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The “Heat Map”

December 27, 2022 | Weekly Commentary

The health of the economy is a key driver of long-term returns in the stock market. Below, we assess the key economic conditions that we believe are of particular importance to investors.



NEUTRAL Real GDP for Q2 2022 decreased at an annual rate of 0.6% (up from the first estimate of -0.9%), marking the second consecutive quarter of declining GDP. The second estimate for Q3 2022 shows Real GDP to have increased by an annual rate of 2.9%, up from the previous advance estimate that reported a 2.6% gain.


NEUTRAL The earnings growth rate for Q3 2022 was 2.4%, which was adjusted upwards from 2.2% last week. All the S&P500 companies reported actual results; 70% beat EPS expectations, while 71% beat revenue expectations. For Q4 2022, earnings are expected to decline by -2.8%. This would be the first negative growth since Q3 2020 (-5.7%).


NEUTRAL U.S. Nonfarm Payrolls for November 2022 increased by 263,000 and the unemployment rate remained unchanged at 3.7%. Wages have risen more than expected at a rate of 5.1% Year over Year. Service sectors contributed the most to the increase in jobs while industries that are sensitive to rising rates, such as construction and manufacturing, have started to level off.


NEGATIVE  The annual inflation rate in the U.S. increased by 7.1% for November 2022 compared to the expected 7.3% — showing some continued signs of deceleration. Core CPI was also reported below expectations at 6.0% versus the estimated 6.1%. Although energy prices have come down, energy, food, and shelter are still the main contributors to inflation.


NEUTRAL Senator Manchin and Majority Leader Schumer reached an agreement on the latest tax and energy bill with incentives for green energy, electric cars, and conversely oil & gas companies for exploration. No changes in private equity taxes or higher tax rates for the very wealthy were enacted. The bill has been officially passed by the Senate. President Biden announced student loan forgiveness of up to $20,000 subject to income limitations.


NEGATIVE Two weeks ago the Fed approved a 50-bps rate hike after four consecutive 75 bps hikes taking its target range to 4.25%-4.50%. Although the magnitude of rate hikes has been decreased, rates are likely to be kept higher through 2023 with no reductions until 2024. According to the FOMC’s dot-plot, the expected terminal rate is now 5.1%.



NEGATIVE Russia held controversial referendums for the annexation of four Ukrainian regions, and the Russian Parliament unanimously recognized these regions as part of Russia. Ukraine and Western countries have condemned these actions by Russia by declaring them illegitimate and illegal. Additional sanctions are being imposed on Russia by many countries.


NEGATIVE COVID-19 lockdowns in China are easing, which should help the global supply chain recover. On the other hand, the Russian-Ukraine war does not show signs of abating. Gas supplies from Russia to Europe have decreased by 88% over the past year, and EU countries have agreed to cut gas usage by 15% as gas prices have more than doubled. The U.S. is now dealing with a significant diesel shortage, with national reserves at their lowest levels since 1951 and a ban on Russian products that will intensify the issue.

The “Heat Map” is a subjective analysis based upon metrics that VNFA’s investment committee believes are important to financial markets and the economy. The “Heat Map” is designed for informational purposes only and is not intended for use as a basis for investment decisions.