In terms of market revival, a lot has been accomplished in the second quarter. Markets have recovered some of the earlier downward trends and the interest rate was raised twice by 75 basis points between June and July.
This is the hottest July since 1939 for the S&P 500 and the best month since November 2020 for the stock market. The US Senate approved the “Inflation Reduction Act of 202022” on July 27th. It includes $369 billion of funding over the next ten year to support energy security and climate change programs. The bill proposes funding for an electric vehicle credit for new and used light and heavy vehicles. However, there are limits to vehicle price, buyer income and geographical considerations for manufacturing or supply chain. It also contains a renewal of 30C electric vehicle charging tax credits and a 30% investment credit for solar and storage for ten years, subject to certain limitations.
This legislation passed the Senate 51-50 with a tie-breaking vote from Vice President Kamala Harris on Sunday, August 7, 2008. It offers tax incentives to reduce carbon emissions, allows Medicare to negotiate the price for some prescription drugs, allocates approximately $80 billion to Internal Revenue Service, and extends subsidies to health insurance under the Affordable Healthcare Act.
It creates a 15% corporate minimum tax and a 1% excise duty on stock buybacks by companies. This sets aside approximately $300 billion for reducing the deficit.
The Senate passed the bill through the evenly divided chamber. This is a win for Democrats that was impossible just weeks ago. After talks between Senator Majority Leader Chuck Schumer (New York) and Sen. Joe Manchin (West Virginia), the negotiations fell apart before being quickly revived. The bill was opposed by every Republican, so any Democratic defect could have cost the Senate the opportunity to pass it. Since Democrats had at different points in the year faced the possibility that no package would be passed, they have generally celebrated the deal, even though it is less than their initial hopes.
The Federal Reserve raised interest rates by 75bps following back-to-back FOMC meeting, bringing the federal funds rates to 2.50. In essence, the federal funds rate is the interest rate banks pay for overnight borrowing in federal funds markets. As consumers, this number is important because it influences other rates such as auto and mortgage loans, as well as the federal funds rate.
Since July’s high of 3.09%, the yield on the 10-year Treasury Note, which has an impact on mortgage rates, has been steadily falling, and reached 2.60% by August 1st. Low Treasury bond yields translate to low mortgage interest rates. This allows buyers to save money on mortgage loans.
If you’ve been watching the news lately, you will have seen outlets express concern about rising interest rates and inflation. People seem to have many opinions about the word “recession”, and it has been used a lot. There are many opinions on the matter. Some say we are in a depression, others fear a future recession and others believe a short-term recession is unlikely. Others say that if there is a downturn, it won’t be a severe one. What is the secret to different conclusions? The difference lies in the semantics. The textbook definition of a “recession” might say that the economy is experiencing negative GDP growth for two consecutive quarters. This would mean that we are technically in a recession.
According to the National Bureau of Economic Research (NBER), it is more complicated than you might think. The NBER, a non-profit organization, is committed to impartial economic research. It is well-respected for its work, and is often sought after because it can predict when a recession starts and ends. According to the NBER website, a recession is defined as “a substantial decline in economic activity that spreads across the economy and lasts longer than a few weeks.” According to the committee, while each of three criteria–depth and diffusion and duration–must be met individually, extreme conditions may partially offset weaker indicators from another. So, even though we had two bad quarters, the committee believes that we aren’t in recession. Although the likelihood of a recession has increased over time, there are not any obvious signs that it is imminent.
On July 12, travelers received great news as the dollar and euro reached parity, or a ratio of 1:1, for the first time since 2002. The U.S. dollar now carries more weight in European countries, which makes it easier to travel to Spain and Italy after the pandemic. CNBC reports that the close parity of the euro and the US dollar means that Americans will receive a 15% discount on their purchases today compared to last year due to the exchange rate. This applies if they are traveling to any of the 19 European Union member countries that accept the euro. The Fed’s efforts in raising interest rates sufficiently high to slow down the economy and lower inflation are reinforced by a strong dollar. When the dollar is stronger, U.S. Treasury bond demand rises which in turn pushes up interest rates.
The global economy has continued to be affected by the Russia-Ukraine conflict, especially in the energy sector. According to AAA, the August 2nd average national gas price was $4.189. This is significantly lower than the $4.822/gal average a month ago. Although gas prices in the U.S. seem to have cooled relative to a month ago there is no doubt that they are still high compared to a month ago. However, this does not negate the fact that price volatility has caused anxiety.
The high fuel and electricity prices will continue to drive up inflation over the years. The Fed may have to deal with volatile prices in such a critical sector of the economy, making it difficult for them to keep interest rates high.
We were able to witness the first commercial shipment leave Ukraine since Russia’s invasion. The ship loaded with grain left Port Odessa on August 1st under an internationally-brokered deal to ease some of the global food shortages. The ship is carrying 26,000 tonnes of corn and is headed for Lebanon. Russia and Ukraine are the two top exporters of food and grain, so food insecurity will continue for some time. This shipment, which will hopefully be a beacon for hope and recovery for the nation in need, will help 14% of Ukraine’s population work in agriculture.
Russia and Ukraine aren’t the only countries making headlines recently. However, Nancy Pelosi traveled to Taiwan on August 2nd in the hope of showing U.S. solidarity for the self-governing island. China and the Chinese Communist Party have reacted positively to this statement, as they dispute the island’s independence. There is much talk about the potential consequences of the House Speaker’s actions, given the amount of activity on U.S.-Chinese social media platforms. China could retaliate against America and further strain U.S.-China relations. As this is an ongoing event it is difficult to predict the outcome of Pelosi’s move, but we hope for a peaceful resolution.
The second half of 2022 will bring unexpected outcomes. Markets dictate the economy and not the other. Be disciplined in your asset allocation strategies. Cash can be your friend when you are defensive.
SIPC. Mark is a contributor to VEGAS MAGAZINE. He has also appeared on CNBC’s CLOSING ELL, YAHOO! FINANCE MIDDAY MARKET MOVERS is a FOX BUSINESS NETWORK article and was quoted in THE WALL STREET Journal.
Angelo Fodera, associate. Forward-looking statements can be affected by significant business, economic, and competitive uncertainties. Actual results may differ materially. Forecasts are not guaranteed and opinions expressed here can change at any moment.
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The first Vegas Legal Magazine article was State of the Market.