Putting Context Around Recent Stock Market Volatility

Stock market volatility is rising this year after a relatively calm 2021. Financial markets are experiencing bigger moves up and down as investors navigate a long list of events, including Federal Reserve interest rate hikes, heightened geopolitical risk, and 40-year high inflation readings. This month’s chart provides historical context around stock market volatility and discusses how to think about your portfolio during periods of increased volatility.

Figure 1 charts the S&P 500 Index’s daily price return since 1970 and overlays the top 30 and bottom 30 days. There are two important takeaways. First, the best and worst trading days historically occur in clusters. Second, timing the market is almost impossible due to the close proximity of good and bad days. As an example, earlier this month the S&P 500 registered its 15th biggest daily return since 1970 after the latest inflation data suggested price pressures may be easing. The +5.5% S&P 500 return on November 10th followed volatile trading during September and October and demonstrates how market volatility occurs in groups.

What can you do to improve the chances of achieving your long-term goals? As always, our team recommends staying balanced and diversified. Different asset classes react to market conditions in different ways. Diversification spreads your investments around so your exposure to, and the potential impact from, any one type of asset is limited. More importantly, focus on the long-term rather than day-to-day price swings. History indicates lengthening your time horizon increases the odds in your favor. Should you have any concerns around market volatility, don’t hesitate to reach out to our team.

Important Notices & Disclaimer

The information and opinions expressed herein are solely those of PFG Private Wealth Management, LLC (PFG), are provided for informational purposes only and are not intended as recommendations to buy or sell a security, nor as an offer to buy or sell a security. Recipients of the information provided herein should consult with their financial advisor before purchasing or selling a security.

The information and opinions provided herein are provided as general market commentary only, and do not consider the specific investment objectives, financial situation or particular needs of any one client. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor.

The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. PFG is not soliciting any action based on this document. Investors should consult with their financial adviser before making any investment decisions. There is no guarantee that any future event discussed herein will come to pass. The data used in this publication may have been obtained from a variety of sources including U.S. Federal Reserve, FactSet, Bloomberg, Bank of America Merrill Lynch, iShares, Vanguard and State Street, which we believe to be reliable, but PFG cannot be held responsible for the accuracy of data used herein. Any use of graphs, text or other material from this report by the recipient must acknowledge MarketDesk Research as the source. Past performance does not guarantee or indicate future results.   Investing   involves   risk,   including   the possible loss of principal and fluctuation of value. PFG disclaims responsibility for updating information. In addition, PFG disclaims responsibility for third-party content, including information accessed through hyperlinks.

No mention of a particular security, index, derivative or other instrument in the report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security, index, or derivative. The report is strictly an information publication and has been prepared without regard to the particular investments and circumstances of the recipient.

READERS   SHOULD   VERIFY   ALL   CLAIMS   AND   COMPLETE    THEIR    OWN RESEARCH AND CONSULT A REGISTERED FINANCIAL PROFESSIONAL BEFORE INVESTING IN ANY INVESTMENTS MENTIONED IN THE PUBLICATION. INVESTING IN SECURITIES AND DERIVATIVES IS SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK, AND READERS MAY LOSE MONEY TRADING AND INVESTING IN SUCH INVESTMENTS.

PFG Private Wealth Management, LLC is a registered investment advisor.

Wage Inflation Puts Additional Pressure on the Federal Reserve

Inflation remains a closely watched topic in financial markets. Core inflation, which excludes volatile food and energy prices, increased +6.6% year-over-year during September. It was the fastest annual pace since August 1982 and signals inflation’s persistence. Early inflation pressures were attributed to clogged supply chains and strong demand overwhelming limited supply, but a new source of inflation is gaining attention as supply chains normalize – wage inflation.

Figure 1 shows hourly wages increased +5% year-over-year during September. The growth rate, which is significantly above the pre-pandemic trend, indicates labor demand is outpacing labor supply and employers are paying more to attract and retain workers. What is causing the labor supply / demand imbalance? Data shows millions of workers left the labor market during the pandemic and have not returned.

Figure 2 graphs the number of people not in the labor force, which is defined as persons who are neither employed nor unemployed. This category includes retired persons, students, individuals taking care of children or other family members, and others who are neither working nor seeking work. The chart shows 95 million individuals were not in the labor force at the end of February 2020. The number spiked to 103.5 million at the end of April 2020 as workers left the labor market due to virus and health concerns, childcare responsibilities, and early retirements. While some of those individuals returned to the labor market, there are nearly 5 million more people not in the labor force at the end of September 2022.

Wage inflation is yet another factor complicating the Federal Reserve’s goal to bring under inflation control. Bringing the labor market back into equilibrium could ease wage inflation, but it could also significantly increase unemployment. Despite the near-term employment risk, the Fed views the risk of inflation becoming entrenched as a bigger long-term risk. All eyes will be on the labor market in coming months.

The information and opinions expressed herein are solely those of PFG Private Wealth Management, LLC (PFG), are provided for informational purposes only and are not intended as recommendations to buy or sell a security, nor as an offer to buy or sell a security. Recipients of the information provided herein should consult with their financial advisor before purchasing or selling a security.

Important Notices & Disclaimer

The information and opinions expressed herein are solely those of PFG Private Wealth Management, LLC (PFG), are provided for informational purposes only and are not intended as recommendations to buy or sell a security, nor as an offer to buy or sell a security. Recipients of the information provided herein should consult with their financial advisor before purchasing or selling a security.

The information and opinions provided herein are provided as general market commentary only, and do not consider the specific investment objectives, financial situation or particular needs of any one client. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor.

The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. PFG is not soliciting any action based on this document. Investors should consult with their financial adviser before making any investment decisions. There is no guarantee that any future event discussed herein will come to pass. The data used in this publication may have been obtained from a variety of sources including U.S. Federal Reserve, FactSet, Bloomberg, Bank of America Merrill Lynch, iShares, Vanguard and State Street, which we believe to be reliable, but PFG cannot be held responsible for the accuracy of data used herein. Any use of graphs, text or other material from this report by the recipient must acknowledge MarketDesk Research as the source. Past performance does not guarantee or indicate future results.   Investing   involves   risk,   including   the possible loss of principal and fluctuation of value. PFG disclaims responsibility for updating information. In addition, PFG disclaims responsibility for third-party content, including information accessed through hyperlinks.

No mention of a particular security, index, derivative or other instrument in the report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security, index, or derivative. The report is strictly an information publication and has been prepared without regard to the particular investments and circumstances of the recipient.

READERS   SHOULD   VERIFY   ALL   CLAIMS   AND   COMPLETE    THEIR    OWN RESEARCH AND CONSULT A REGISTERED FINANCIAL PROFESSIONAL BEFORE INVESTING IN ANY INVESTMENTS MENTIONED IN THE PUBLICATION. INVESTING IN SECURITIES AND DERIVATIVES IS SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK, AND READERS MAY LOSE MONEY TRADING AND INVESTING IN SUCH INVESTMENTS. PFG Private Wealth Management, LLC is a registered investment advisor.

Consumers Turn to Credit Cards as Inflation Pressures Finances

This month’s charts examine the trend of increasing consumer credit usage. Figure 1 charts the amount of outstanding revolving consumer credit, and Figure 2 charts the year-over-year percentage growth of revolving credit. Revolving credit, such as a credit card, allows the accountholder to borrow money repeatedly up to a set credit limit while making monthly payments. The charts show credit usage initially decreased during the pandemic as consumers used government stimulus checks and savings from fewer discretionary purchases to pay down debt.

After declining during the pandemic, data shows consumer credit usage is rising again and now back above pre-pandemic levels. The increase in credit usage started during 2021 as the effect of stimulus checks faded and the economic reopening released a wave of pent-up demand. Credit usage continues to increase during 2022 as inflation increases the price of everyday necessities, such as gas, groceries, and housing.

The increase in consumer credit usage raises an important point. Credit cards are an easy and common way to borrow money, but they are also one of the most expensive forms of borrowing. Most credit cards charge a variable interest rate tied to the prime rate, which is linked to the federal funds rate. This year’s interest rate increases by the Federal Reserve are intended to ease inflation pressures, but they also make carrying a credit card balance more expensive. An increase in the federal funds rate increases the prime rate, which in turn increases the interest rate charged on credit cards. According to a recent survey by Bankrate.com, the average credit card interest rate reached 17.96% at the end of August, which marks the highest level since 1996.

The increase in mortgage and auto loan rates is getting all the attention this year, but the increase in credit card interest rates is more impactful to everyday life. Credit cards are a valuable tool to manage your personal finances, such as building up a credit score, increasing your purchasing power, and earning rewards. However, credit cards can also create negative issues, such as overspending, high balances, and high interest expenses, when misused and mismanaged. Now is an important time to review your financial plan and make sure you’re sticking to it.

Important Notices & Disclaimer

The information and opinions expressed herein are solely those of PFG Private Wealth Management, LLC (PFG), are provided for informational purposes only and are not intended as recommendations to buy or sell a security, nor as an offer to buy or sell a security. Recipients of the information provided herein should consult with their financial advisor before purchasing or selling a security.

The information and opinions provided herein are provided as general market commentary only, and do not consider the specific investment objectives, financial situation or particular needs of any one client. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor.

The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. PFG is not soliciting any action based on this document. Investors should consult with their financial adviser before making any investment decisions. There is no guarantee that any future event discussed herein will come to pass. The data used in this publication may have been obtained from a variety of sources including U.S. Federal Reserve, FactSet, Bloomberg, Bank of America Merrill Lynch, iShares, Vanguard and State Street, which we believe to be reliable, but PFG cannot be held responsible for the accuracy of data used herein. Any use of graphs, text or other material from this report by the recipient must acknowledge MarketDesk Research as the source. Past performance does not guarantee or indicate future results.   Investing   involves   risk,   including   the possible loss of principal and fluctuation of value. PFG disclaims responsibility for updating information. In addition, PFG disclaims responsibility for third-party content, including information accessed through hyperlinks.

No mention of a particular security, index, derivative or other instrument in the report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security, index, or derivative. The report is strictly an information publication and has been prepared without regard to the particular investments and circumstances of the recipient.

READERS   SHOULD   VERIFY   ALL   CLAIMS   AND   COMPLETE    THEIR    OWN RESEARCH AND CONSULT A REGISTERED FINANCIAL PROFESSIONAL BEFORE INVESTING IN ANY INVESTMENTS MENTIONED IN THE PUBLICATION. INVESTING IN SECURITIES AND DERIVATIVES IS SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK, AND READERS MAY LOSE MONEY TRADING AND INVESTING IN SUCH INVESTMENTS. PFG Private Wealth Management, LLC is a registered investment advisor.

Providing Context on Recent Market Volatility

Monthly Market Summary

  • The S&P 500 Index returned -4.1% during August, underperforming the Russell 2000 Index (-2.0%) for a second consecutive month.
  • Energy (+2.7%) was the top-performing S&P 500 sector during August despite oil prices falling -9.7%. Utilities (+0.5%) was the only other sector to produce a positive return. Technology (-6.2%) was the worst performing sector as interest rates rose, followed closely by Health Care (-5.8%) and Real Estate (-5.6%).
  • Corporate investment grade bonds generated a -4.4% total return, slightly underperforming corporate high yield bonds’ -4.3% total return.
  • The MSCI EAFE Index of global developed market stocks returned -6.1% during August, underperforming the MSCI Emerging Market Index’s -1.3% return.

Stock & Bond Markets Endure a Bumpy August After July’s Gains

The S&P 500 produced a -4.1% return during August, but the headline number doesn’t tell the full story. Equity markets initially rallied during the first half of the month, with the S&P 500 gaining +4.2% through August 16th as July’s market rally continued. However, the second half of August marked a sharp reversal as the S&P 500’s gave back all its gains plus more. Credit markets also experienced a reversal during August as interest rates reversed higher and bonds produced negative returns. The increased volatility across stock and bond markets is being attributed to a wide range of investor views creating a tug of war effect in markets, as well as uncertainty regarding how long the Federal Reserve will continue to raise interest rates.

Federal Reserve Chair Pushes Back Against Hopes for Policy Pivot

The Federal Reserve held its annual August Jackson Hole meeting, and Chair Powell used his speech to forcefully push back against the notion the Fed will pivot and cut interest rates if economic data starts to weaken. Powell emphasized the central bank’s “overarching focus right now is to bring inflation back down to our 2 percent goal” and cautioned, “Reducing inflation is likely to require a sustained period of below-trend growth … [and] will also bring some pain to households and businesses.”

Investor hopes for a Fed pivot were one of the primary catalysts that propelled the stock market higher during July and August. Chair Powell’s speech dashed those hopes and sent the S&P 500 down more than -3% on the day of his speech. Why? Two lines from Chair Powell’s speech underscore the Fed’s goal, “There is clearly a job to do in moderating demand to better align with supply. We are committed to doing that job.” This focus on lowering demand for goods and services may increase portfolio volatility during the months ahead as investors debate how long it will take the Fed to achieve its goal and the impact tighter policy will have on the economy.

Important Notices & Disclaimer

The information and opinions expressed herein are solely those of PFG Private Wealth Management, LLC (PFG), are provided for informational purposes only and are not intended as recommendations to buy or sell a security, nor as an offer to buy or sell a security. Recipients of the information provided herein should consult with their financial advisor before purchasing or selling a security.

The information and opinions provided herein are provided as general market commentary only, and do not consider the specific investment objectives, financial situation or particular needs of any one client. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor.

The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. PFG is not soliciting any action based on this document. Investors should consult with their financial adviser before making any investment decisions. There is no guarantee that any future event discussed herein will come to pass. The data used in this publication may have been obtained from a variety of sources including U.S. Federal Reserve, FactSet, Bloomberg, Bank of America Merrill Lynch, iShares, Vanguard and State Street, which we believe to be reliable, but PFG cannot be held responsible for the accuracy of data used herein. Any use of graphs, text or other material from this report by the recipient must acknowledge MarketDesk Research as the source. Past performance does not guarantee or indicate future results.   Investing   involves   risk,   including   the possible loss of principal and fluctuation of value. PFG disclaims responsibility for updating information. In addition, PFG disclaims responsibility for third-party content, including information accessed through hyperlinks.

No mention of a particular security, index, derivative or other instrument in the report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security, index, or derivative. The report is strictly an information publication and has been prepared without regard to the particular investments and circumstances of the recipient.

READERS   SHOULD   VERIFY   ALL   CLAIMS   AND   COMPLETE    THEIR    OWN RESEARCH AND CONSULT A REGISTERED FINANCIAL PROFESSIONAL BEFORE INVESTING IN ANY INVESTMENTS MENTIONED IN THE PUBLICATION. INVESTING IN SECURITIES AND DERIVATIVES IS SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK, AND READERS MAY LOSE MONEY TRADING AND INVESTING IN SUCH INVESTMENTS.

PFG Private Wealth Management, LLC is a registered investment advisor.

Declining Labor Productivity & Rising Labor Costs

This month’s chart looks at a trend not seen in decades – declining labor productivity and rising labor costs. Figure 1 shows labor productivity, which is measured as economic output per hour worked, declined -2.5% year-over-year during the second quarter. The -2.5% decline in labor productivity is the largest decline in the data series, which began in the first quarter of 1948. Hourly compensation rose +6.7% year-over-year as a tight labor market drove strong wage growth.

A look at the underlying data provides additional context on declining productivity. Total output rose +1.5% compared to the same quarter a year ago, while hours worked rose a bigger +4.1% year-over-year. The data indicates workers produced more goods and services less efficiently. Why is productivity declining? One potential explanation is pandemic-related themes, such as remote work and inflation, make the process of measuring productivity more difficult and distort the data.

Thematic changes may also explain the productivity decline. The labor market experienced significant turnover during the pandemic, and it takes time for workers to learn new jobs. As an example, Delta’s CEO pointed to labor turnover as a cause of the airline’s recent operational issues: “Since the start of 2021, we’ve hired 18,000 new employees, and our active head count is at 95% of 2019 levels, despite only restoring less than 85% of our capacity. The chief issue we’re working through is not hiring, but of training and experience bubble.” In addition, capacity constraints may also be weighing on productivity. The capacity utilization rate, which measures the amount of potential output that is actually being realized, was 80% during June 2022. The peak utilization rate over the past 20 years was ~81%, suggesting businesses may be running up against the limit of how much capacity they can use efficiently.

The combination of declining productivity and rising compensation costs is a notable trend, and it remains to be seen whether it is a short-term phenomenon or start of a longer-term trend. One trend we will be monitoring in coming quarters is whether decreased efficiency and rising labor costs negatively impact profit margins.

Important Notices & Disclaimer

The information and opinions expressed herein are solely those of PFG Private Wealth Management, LLC (PFG), are provided for informational purposes only and are not intended as recommendations to buy or sell a security, nor as an offer to buy or sell a security. Recipients of the information provided herein should consult with their financial advisor before purchasing or selling a security.

The information and opinions provided herein are provided as general market commentary only, and do not consider the specific investment objectives, financial situation or particular needs of any one client. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor.

The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. PFG is not soliciting any action based on this document. Investors should consult with their financial adviser before making any investment decisions. There is no guarantee that any future event discussed herein will come to pass. The data used in this publication may have been obtained from a variety of sources including U.S. Federal Reserve, FactSet, Bloomberg, Bank of America Merrill Lynch, iShares, Vanguard and State Street, which we believe to be reliable, but PFG cannot be held responsible for the accuracy of data used herein. Any use of graphs, text or other material from this report by the recipient must acknowledge MarketDesk Research as the source. Past performance does not guarantee or indicate future results.   Investing   involves   risk,   including   the possible loss of principal and fluctuation of value. PFG disclaims responsibility for updating information. In addition, PFG disclaims responsibility for third-party content, including information accessed through hyperlinks.

No mention of a particular security, index, derivative or other instrument in the report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security, index, or derivative. The report is strictly an information publication and has been prepared without regard to the particular investments and circumstances of the recipient.

READERS   SHOULD   VERIFY   ALL   CLAIMS   AND   COMPLETE    THEIR    OWN RESEARCH AND CONSULT A REGISTERED FINANCIAL PROFESSIONAL BEFORE INVESTING IN ANY INVESTMENTS MENTIONED IN THE PUBLICATION. INVESTING IN SECURITIES AND DERIVATIVES IS SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK, AND READERS MAY LOSE MONEY TRADING AND INVESTING IN SUCH INVESTMENTS.

PFG Private Wealth Management, LLC is a registered investment advisor.