Wall Street pummeled with rate hikes and inflation

Business Alabama's year in the stock market

Wall Street officially entered a bear market in June 2022, and that set the tone for the rest of the year, which ran from May 31, 2022 through May 31, 2023.  Inflation dominated the skyline, and as our year ended, the Federal Reserve’s aggressive rate hikes seemed to be taking effect in many sectors — the exception being the persistently sturdy labor market.

However, whiplash-inducing July 2022 ended as the best month since November 2020. Wall Street and exchanges around the world responded in kind to the Federal Reserve’s unusual step of hiking interest rates by three-quarters of a point in June, followed by another hike of the same size in July. As our year closed, the Fed hiked rates another quarter point, with hints that the central bankers might pause their rate increases in June but resume them in July 2023, pending economic news.

The Business Alabama indices ended down, with local stocks falling 337.84 points, or 14.33%, and closing at 2,019.08. Declining issues beat out advancing issues by a 7-to-1 margin. The Comprehensive Index fared better, adding 107.06 points, or 5.32%, and ending at 2,117.68. However, declining issues still bested advancing issues by a 41-to-14 count.

The national markets reflected the turbulence on Wall Street, with the S&P 500 Index starting and ending our annual session in nearly the same place. The other national indexes showed a similar pattern. The low point of the year for both the Dow industrials and the S&P 500 was September; for the Nasdaq, September was also low, but the bottom came in December.

Inflation began to take a toll on consumers’ moods. The Conference Board reported that consumer confidence fell again in July 2022; at 95.7, it compared with June’s 98.4, the lowest reading since February 2021. The rest of the year see-sawed, with a high of 109 in December. Despite the strong labor market, confidence began eroding then, and, with minor fluctuations, ended May 2023 at 102.3. Since 70% of the U.S. economy is generated by the consumer, this gauge, and retail sales, are important figures in any assessment. Retail sales see-sawed throughout the year.

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Fears of recession kept cropping up, but the blessing, and perhaps also the curse this year, came from the surprisingly robust labor market, which increased despite the Fed’s tightening efforts. It also kept the economy from tipping into a recession. Despite the tension between working from home and returning to the office, job creation continued to produce a healthy number of jobs and unemployment generally stayed above the benchmark of 200,000 weekly claims; the percentage of unemployment hovered near 50-year lows. Monthly job creation exceeded 200,000 most months. June began with the addition of 293,000 jobs; July stunned market-watchers with 537,000 jobs; outsized strength in January at 511,000 jobs, February with 311,000, and May with 339,000 jobs. Still, the employment picture has changed since the pandemic with no clear conclusions yet.

Manufacturing, while not beset with as many supply chain issues as the year before, still remained lackluster. The S&P Global Manufacturing Purchasing Manager’s Index (PMI) was most robust in June, at 52.7; while relatively strong, it was the slowest growth in factory activity since July, 2020. Manufacturing mostly shrank except for September; the lowest month was December, at 46.2, well below forecasts of 47.7. Incremental increases followed, except for an unexpected jump in April, with a reading of 50.4; economists had expected 49. The index slid to 48.4, amid fewer new orders and a softening of demand.

One of the most dramatic results of the Fed’s rate hikes played out in home sales as mortgage rates rose. The National Association of Home Builders/Wells Fargo Housing Market Index began June with a reading of 67, tumbling to a low of 31 in December, and slowly gaining ground in 2023 to a reading of 50 in May. Any figure below 50 indicates contraction. Higher mortgage rates joined with fewer sales of existing homes to create a troubling housing market for buyers and renters alike. However, the National Association of Realtors said that existing home sales jumped in February to the strongest rate in six months. Sales bounded ahead 14.5%, from January, to a seasonally adjusted rate of 4.58 million homes, the best figure since September and higher than expected by economists polled by FactSet, which pegged sales at 4.2 million. In April, however, sales of existing homes were still 23% below their level a year before.

For the Business Alabama Index, perhaps the most salient influence was bank failures that began in March 2023. They started with tech-heavy banks in the Silicon Valley, but soon the tremors were felt throughout the banking industry, especially with mid-sized banks and real estate investment trusts (REITs). Although actual failures were few and deposits were shored up by the actions of the federal government, the results were felt and reflected in our yearly results. Investment in housing dropped at a 0.2% annual rate from January through March.

Despite all the churning, inflation remains the hot topic in the stock market. “Consumers — the critical lynchpin to the U.S. economy — are still spending, tapping into savings and credit to be able to do so,” said Jim Baird, chief investment officer for Plante Moran Financial Advisors. “That can’t persist indefinitely though, raising the risk of a more pronounced slowdown or recession the longer the Fed’s battle with inflation drags on.”

Medical Properties Trust, a real estate investment trust headquartered in Birmingham, shed 10.33 points, or 55.60%. For 2022, MPW posted total revenue of $1.543 billion, from $1.545 billion in 2021. Net income was $902.6 million, or $1.51 per share, from $656.9 million, or $1.11 per share in the previous year. MPW ended at 8.25, and was the top percentage loser in the Alabama Index.

Vulcan Materials was the top dollar gainer this year, jumping 30.63 points, or 18.58%, to close at 195.50. For 2022, VMC posted net income of $575.6 million, or $4.21 per share, compared to net income of $670.8 million, or $5.02 per share in 2021. Revenue was $7,315.2 million, versus $5,552.2 million last year. The company cited cold and wet weather in the fourth quarter that pressured shipments and construction. In February, the company announced an increase in its dividend, to $0.43 per share, from $0.40 per share last year. 

ServisFirst Bancshares tumbled 43.06 points, or 51.66%. For the year, SFBS posted interest income of $559,315,000, compared to last year’s $416,305,000. Net income was $252 million, or $4.61 per share, versus $208 million, or $3.82 per share in 2021. SFBS ended at 40.30, and was the top dollar loser.

Margot Crabtree covers stocks for Business Alabama, under contract with her company, Trade Trends.

This article appears in the August 2023 issue of Business Alabama.

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