U.S. stocks have collapsed this year, with the major bourses in bear market (a drop of 20% or more from a recent high). Russia’s invasion of Ukraine, persistently high inflation, aggressive rate hikes by the Fed and global growth concern have roiled the stock market badly.
With just a couple of days left to end the first nine months of 2022, the S&P 500 is down about 22%. The Dow Jones and the Nasdaq have plunged 18% and 29%, respectively. Below, we discuss some of the hot events of the first nine months of this year that influenced the market in a big way: Skyrocketing Inflation
Inflation in the United States is hovering near a 40-year high. The consumer price index climbed 8.3% year over year in August, down from an 8.5% rise in July but higher than an 8.1% increase, as expected by the analysts. Declining gasoline prices were offset by gains in the costs of rent and food.
Investors could make some profits by investing in ETFs like Invesco DB Commodity Index Tracking Fund ( DBC Quick Quote DBC - Free Report) , benefiting from rising inflation. Invesco DB Commodity Index Tracking Fund is used to satisfy the demand for inflation-hedging instruments. It follows the DBIQ Optimum Yield Diversified Commodity Index Excess Return, composed of futures contracts on 14 of the most heavily traded and important physical commodities in the world (read: 5 Reasons to Buy Commodities ETFs Right Now). Invesco DB Commodity Index Tracking Fund has AUM of $3 billion and charges 87 bps in annual fees. The fund trades in an average daily volume of 3.5 million shares and has gained 14% so far this year. Aggressive Fed Tightening
The Federal Reserve has been on an aggressive tightening policy this year to fight skyrocketing inflation, which is running near its highest levels since the early 1980s. In the latest FOMC meeting, Fed Chair Jerome Powell raised interest rates by another three-quarters of a percentage point. This marks the third consecutive interest-rate hike of 0.75% and pushed the benchmark interest rate, the federal funds rate, to a 3.0-3.25%, the highest level since 2008.
The central bank also signaled that additional large rate hikes are on the way at the upcoming meetings as it combats inflation that remains near a 40-year high. Fed officials now expect the federal funds rate at a range of 4.25% to 4.5%, a full percentage point above 3.25% to 3.5% to end 2022, projected in June. This suggests the central bank could approve another three-quarter point hike at its November meeting and then a half-point rate rise in December. Simplify Interest Rate Hedge ETF ( PFIX Quick Quote PFIX - Free Report) seeks to provide a hedge against a sharp increase in long-term interest rates and benefit from market stress when fixed-income volatility increases, while providing the potential for income. It buys put options on longer-term Treasury bonds to offer “the most liquid and the most cost-efficient way of getting interest rate protection.” Simplify Interest Rate Hedge ETF is the first ETF providing a simple, direct and transparent interest rate hedge. PFIX has accumulated $346.6 million in its asset base and trades in an average daily volume of 1530,000 shares. It charges 50 bps in annual fees and has soared nearly 82% this year (read: 5 ETFs Up 20% or More in the First Nine Months of 2022). Dollar Surge
The U.S. dollar against a basket of currencies has been rising lately, soaring to a 20-year high on an aggressive rate hike. Rising fears of a global recession also strengthened the greenback as a safe-haven asset.
A strong dollar attracts foreign money from investors seeking dollar-denominated returns instead of their home currencies. Additionally, energy cost in America decreases with a strong dollar, thereby lowering industrial cost and increasing profits, and propelling the overall economy in turn. As such, a strong dollar provides an edge to domestic-focused companies. While the small-cap space is crowded with ETFs, iShares Core S&P Small-Cap ETF ( IJR Quick Quote IJR - Free Report) , with a Zacks ETF Rank #2 (Buy), seems compelling pick. It follows the S&P SmallCap 600 Index and holds 677 stocks in its basket with key holdings in financials, industrials, information technology, consumer discretionary and healthcare that account for a double-digit exposure each. iShares Core S&P Small-Cap ETF has AUM of $60 billion and trades in an average daily volume of 3.5 million shares. The product charges investors 6 bps in annual fees. Recession Fears
The increase in interest rates has made borrowing expensive, driving up the cost of buying a new car or house, or increase the cost of carrying credit card debt and thus slow down economic growth. The consumer staples sector is viewed as defensive as it includes a variety of items like food & beverages, non-durable household goods, hypermarkets and consumer supercenters that are essential for daily needs. These products see steady demand even during an economic downturn due to their low levels of correlation with economic cycles.
Invesco Dynamic Food & Beverage ETF ( PBJ Quick Quote PBJ - Free Report) offers exposure to 31 stocks engaged in manufacturing, selling or distributing food and beverage products, agricultural products and products related to the development of new food technologies by tracking the Dynamic Food & Beverage Intellidex Index. With an AUM of $316.9 million, Invesco Dynamic Food & Beverage ETF charges 63 bps worth of annual fees from investors and sees a moderate average daily volume of 89,000 shares. PBJ has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. Energy Sector: A Winner
Though energy sector has witnessed weakness lately on waning demand and Fed’s aggressive rate hikes, it remained the outperformer this year. Tightening supply conditions have been driving the sector higher given OPEC new output cut and the unrest in Libya. The OPEC has decided to cut oil output by 100,000 barrels per day from October in the latest meeting. Further, the United States is bracing for a busy hurricane season, when supply constraints will emerge again and push oil prices higher. This will continue to provide an upward thrust to the sector.
Invesco Dynamic Energy Exploration & Production ETF ( PXE Quick Quote PXE - Free Report) is the winner gaining nearly 37%. It follows the Dynamic Energy Exploration & Production Intellidex Index, which thoroughly evaluates companies involved in the exploration and production of natural resources used to produce energy based on a variety of investment merit criteria, including price momentum, earnings momentum, quality, management action and value (read: Should You Buy Energy ETFs On Dip?). Holding 31 stocks in its basket, Invesco Dynamic Energy Exploration & Production ETF has amassed $233 million in its asset base and charges 63 bps in annual fees. It trades in a volume of 89,000 shares and has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook.