Navigating the Impact and Uncertainty of Global Energy Insecurity.
HWM Market Recap - September 2022
Executive Market Summary
Energy, like food and shelter, is essential to our everyday lives and therefore is fundamental to our investments. To meet our needs, we require affordable and reliable energy -- everything in economics is about tradeoffs. When the price of a necessity rises, most individuals must use less of it or forego the use of something else. Those who can afford the price increase will have reduced discretionary funds or savings. For businesses, perhaps a portion of the additional cost can be passed on to customers. Maybe offsetting changes can be made. Frequently, however, profits will decline; and at some point, companies have to cut back or go out of business.
Reliability is the other consideration. Problems include rolling blackouts, power outages due to storms, gas line interruptions, supply chain disruptions, system malfunctions, falling water levels limiting hydropower, weather conditions wreaking havoc on wind and solar, and power plants being shuttered for one reason or another. The point is that low energy prices are beneficial, and reliable power sources are necessary for developed and developing economies. Conversely, for most people, rising energy costs, especially with repeated supply disruptions, will lead to a lower standard of living.
For important reasons, the global mix of energy must become cleaner. The objective is to transition in ways that are affordable and reliable. Recently, the European Commission president, Ursula von der Leyden, declared an energy emergency: “The skyrocketing electricity prices are now exposing, for different reasons, the limitations of our current electricity design.” Time Magazine reported that European “energy prices are ten times higher than the five-year average.” In Prague, tens of thousands of Czechs protested continued energy hyperinflation resulting in a cost-of-living crisis for ordinary people. Perhaps the war in Europe is to blame; undoubtedly, there are other contributing factors.
The New York Times reported that “there is rising panic about the cost of energy” across Britain and that “there could be a tsunami of closings over the winter… especially pubs and restaurants.” The Financial Times reports that “German manufacturers are halting production in response to the surge in energy prices.” The German economy minister, Robert Habeck, pointed out that: “$2 trillion of value added depends on $20 billion of gas from Russia … that’s 100-times leverage.” I fear that energy scarcity will continue (or even worsen) for Europe and the world economy at large heading into the winter.
In China, water scarcity is causing power shortages, while electric vehicle owners are asked to schedule charging their cars when the grid is not overburdened to prevent blackouts. Here at home, the California Independent System Operator told customers that over Labor Day weekend: “set thermostats to 78 degrees or higher, avoid using large appliances and charging electric vehicles.”
All of this is to say that the problem will take many years to resolve and that various energy sources must be included in any mix of solutions. Consider that nuclear is an essential answer to decarbonizing a sustainable power grid. A recent article in the BBC pointed out that “the world’s coal-fired power stations currently generate waste containing around 5,000 tons of uranium and 15,000 tons of thorium. Collectively, that’s over 100 times more radiation dumped into the environment than that released by nuclear power stations.”
In closing, energy is fundamental to our way of life and our investment decision-making. We will continue to study and inform ourselves on this crucial topic and carefully consider its implications in our investment advisory process.
Monthly Changes in Major Indices
S&P 500: -3.34%
Dow Jones Industrial Average: -2.98%
Nasdaq Composite: -4.00%
Monthly Performance By Sector
Energy (XLE) +3.60%
Utilities (XLU) +1.19%
Financials (XLF) -1.22%
Consumer Staples (XLP) -1.25%
Industrials (XLI) -2.01%
Materials (XLB) -2.28%
Consumer Discretionary (XLY) -3.54%
Communication Services (XLC) -3.76%
Health Care (XLV) -5.17%
Real Estate (XLRE) -5.28%
Technology (XLK) -5.29%
Monthly Top 5 Performers
Energy (XLE) +3.60%
After spending the last two months as the worst performing sector, Energy is back on top as the best performing sector for the month of August. Its leaders included: ConocoPhillips (+13.93%), Devon Energy Corp (+13.09%), Marathon Petroleum Corp (+11.40%), EOG Resources Inc (+9.57%), and Occidental Petroleum Corp (+9.52%).
Utilities (XLU) + 1.19%
Utilities, again, finished in the top five performing sectors in August, with its leaders being: The AES Corp (+14.49%), American Electric Power Co Inc (+3.62%), Eversource Energy (+2.89%), Evergy Inc (+2.48%), and Entergy Corp (+2.36%).
Financials (XLF) -1.22%
Financials finished the month of August as the third-best performing sector. Leading the sector were: Progressive Corp (+7.98%), Charles Schwab Corp (+5.31%), MetLife Inc (+3.55%), The Travelers Companies Inc (+3.00%), and Wells Fargo & Co (+1.32%).
Consumer Staples (XLP) -1.25%
Consumer Staples finished August back in the top five performing sectors. Its leaders included: Archer-Daniels-Midland Co (+6.29%), General Mills Inc (+2.93%), Altria Group Inc (+2.87%), The Kroger Co (+2.87%), and Clorox Co (+2.70%).
Industrials (XLI) -2.01%
Industrials have been among the top five performing sectors month-over-month for the last three months. Its leaders for August included: Deere & Co (+7.45%), Trane Technologies PLC (+5.34%), Waste Management Inc (+3.75%), Lockheed Martin Corp (+2.73%), and General Dynamics Corp (+1.96%).
Political Events Influencing the Economy
According to the August Consumer Price Index, prices in July were unchanged month-over-month from June. On an annual basis, July prices jumped 8.5%, less than the 9.1% spike in June. The “core CPI,” which disregards energy and food costs, increased only 0.3% in July, much lower than June’s 0.7% gain, indicating changing consumer appetite for goods and services and easing supply shortages. August’s CPI report is a hopeful sign of more inflation reduction to come, but only time will tell.
According to a survey by The Balance, over one-third of U.S. adults say they are reconsidering significant milestones such as buying a house or car because of inflation. Purchasing a car is the #1 milestone to be delayed.
The national average gas fell again in August to $3.79 (as of 9/5/22), per AAA. It’s down $1.23, or 25%, from the record high of $5.02 on June 14.
The U.S. added 528,000 jobs in July, while the unemployment rate sank to 3.5%, matching a 50-year low. In addition, total employment in the U.S. has now fully returned to its levels before the pandemic in February 2020.
The National Association of Home Builders (NAHB) reported that its sentiment index dropped for the eighth straight month and turned negative. The index has not been negative since the start of the pandemic. The data led the NAHB to declare that the nation is facing a “housing recession.”
The average rate on a 30-year fixed-rate mortgage rose to 5.22% in August, down from the 5.81% peak in June but above the 4.99% rate recorded last week, according to Freddie Mac. For reference, at the start of 2022, the average rate on a 30-year fixed-rate mortgage stood at 3.11%.
The National Association of Realtors (NAR) reported in August that existing home sales dropped 5.9% in July. It was the sixth consecutive month of declines and the fewest homes sold since June 2020 when the market slumped during the early days of the COVID-19 pandemic. Additionally, reports showed that U.S. homebuilding sank to its lowest level in over a year, with housing starts plunging by 9.6%. This comes as the national median price for a single-family home reaches a record $413,500, rising 14.2% compared to a year earlier and the first time prices exceeded $400,000.
President Biden signed into law the Inflation Reduction Act of 2022, which aims to reduce health costs, cut greenhouse gas emissions, and raise taxes on corporations and wealthy investors. The law also authorizes $80 billion in additional funding over ten years to the IRS.
President Biden signed the CHIPS Act into law, providing $250 billion of government spending on various federal programs. As part of that amount, the law provides $52 billion in subsidies to semiconductor companies to incentivize them to bring manufacturing back to the U.S. rather than overseas.
President Biden announced that the federal government would forgive up to $10,000 in federal student loans for borrowers making up $125,000 in adjusted gross income per year (if their filing status is single) and up to $250,000 (for couples married filing jointly). Additionally, up to $20,000 would be forgiven for Pell Grant recipients. The forgiveness applies to federal student loans for both undergraduate and graduate degree programs, as well as Parent Plus loans. Biden also included a four-month extension on the moratorium of loan repayments, thus encompassing the seventh (and likely final) extension on the repayment freeze since March 2020. A study from the Penn Wharton Budget Model estimates the program’s cost to be between $605 billion and $1 trillion over ten years, depending on future details of the program. As the president does not legally have the expressed power to forgive student debt, this decision will likely face challenges in court.
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About the Author
Holzberg Wealth Management is a family-owned and operated financial planning and investment management firm based in Marin County, CA. As your financial advisors, we serve you as a fiduciary and are fee-only, so we never receive commissions of any kind. We help individuals and families like you in the greater San Francisco Bay Area and virtually nationwide with the financial decision-making process to organize, grow, and protect your assets.
** This writing is for informational purposes only. The author and Holzberg Wealth Management do not guarantee or otherwise promise any results that may be obtained from using this report. No reader should make any investment decision without first consulting their financial advisor and conducting their own research and due diligence. These commentaries, analyses, opinions, and recommendations represent the personal and subjective views of the author and do not constitute a recommendation, offer, or solicitation to make any securities transaction. The information provided in this report is obtained from sources that the author believes to be reliable. External links to third parties are being provided for informational purposes only. Holzberg Wealth Management is not affiliated with the third-party websites linked to, unless otherwise explicitly stated, and does not constitute an endorsement or approval by Holzberg Wealth Management of any of the third party’s products, services, or opinions.