3Q 2022 Market Summary
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Financial markets continued to struggle during the third quarter of 2022 due to persistently high inflation, higher interest rates, and concerns of a potential recession. While uncertainty remains, we see a silver lining in shrinking equity valuations and the opportunity to invest in bonds that now earn a reasonable return for the first time in years.
Inflation remained above 8% during Q3, a figure well above the Fed’s inflation target. In response, the Federal Reserve has raised its key Fed Funds rate by 75 basis points at each of their last three consecutive meetings, causing interest rates across the yield curve to spike to multi-year highs. The impact of these higher rates began to show across the economy during Q3. For example, the source of inflation has recently shifted. Economically sensitive goods such as oil and lumber declined during the quarter, while wages, food, and other service-related costs remain high. In addition, the US dollar’s role as an investor safe haven during uncertain times caused the value of foreign currencies to decline considerably during the quarter and will likely create a headwind to the earnings of companies that do business overseas.
The uncertainty around whether the Federal Reserve can tame inflation without tipping the economy into a recession has created significant volatility across all asset classes. This year marks the sixth time in the past 20 years that the S&P 500 Index has fallen at least 20%. The once every three- or four-year occurrence creates fear and anxiety amongst investors, and rightfully so, as it is very unpleasant to see your portfolio value decline significantly. Each of the six corrections have been caused by an economic slowdown that led to either the fear of a recession or an actual recession. Although the causes of these economic slowdowns have varied widely, each time the economy and the S&P 500 Index recovered and achieved new highs.
When investing, an investor’s long-term results will be significantly affected by their reaction to market volatility. If an investor can avoid the urge to move in and out of the stock market, in an attempt to side-step short-term volatility, we firmly believe they will be better off in the long run.
Stocks rebounded during the first two months of the quarter, but gave back those gains and more in September following renewed focus on a global economic slowdown. The S&P 500 fell 4.9% during the quarter, with the more cyclical value stocks down 5.6%, while growth stocks fell 3.6%. The energy and consumer discretionary sectors experienced modest gains during the quarter, while every other sector fell. The Russell Mid-Cap Index and Russell 2000 Index of small companies fell 3.4% and 2.2% respectively.
In overseas markets, the MSCI EAFE fell 9.4% during the quarter due to heightened concerns of a recession in Europe, but almost six points of that decline was due to a strengthening US dollar. The MSCI Emerging Markets Index fell 11.6%.
Rising interest rates are creating one of the worst years for bond prices in over 40 years. Short-term rates rose even more than longer-term rates as the market priced in a greater likelihood of a hawkish Federal Reserve over the next few years. For example, one-year Treasury yields rose from 2.8% to 4.1% during the quarter, while 10-year Treasury yields rose from 3% to 3.8%. This caused the Bloomberg US Aggregate Bond Index to fall 4.8%. High-yield bonds and floating rate loans both held up relatively well, with high-yield bonds down less than 1% during the quarter, and floating rate loans posting a positive 1.4% return. The Bloomberg Municipal Bond Index fell 3.5%.
The Bloomberg Commodity Index fell 4.1% during the quarter. Oil prices fell from around $107 per barrel to $80 at the end of September. Gold prices fell 8.1% during the quarter due to pressure from a strengthening dollar.
The Bloomberg Commodity Index is a broadly diversified commodity price index distributed by Bloomberg Index Services Limited.
The Bloomberg US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.
The Bloomberg US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.
The Bloomberg US Government/Credit 1-3 Year Index is an unmanaged index considered representative of performance of short-term US corporate bonds and US government bonds with maturities from one to three years.
The Bloomberg US High Yield Corporate Bond Index is a rules-based, market-value-weighted index engineered to measure publicly issued non-investment grade USD fixed-rate, taxable and corporate bonds.
The LBMA Gold Price Index is the global benchmark for unallocated gold and silver delivered in London.
The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. and Canada.
The MSCI Emerging Markets Index is an index designed to measure equity market performance in global emerging markets.
The Russell 1000 Growth Index is a broadly diversified index predominantly made up of growth stocks of large US companies.
The Russell 1000 Value Index is a broadly diversified index predominantly made up of value stocks of large US companies.
The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The index is maintained by FTSE Russell, a subsidiary of the London Stock Exchange Group.
The Russell Midcap Index is a market capitalization-weighted index comprised of 800 publicly traded U.S. companies with market caps of between $2 and $10 billion.
The Standard & Poor’s 500 Index, often abbreviated as S&P 500, is an American stock exchange market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices.
The S&P 500 Energy comprises those companies included in the S&P 500 that are classified as members of the GICS energy sector.
The S&P/LSTA US Leveraged Loan 100 Index is designed to reflect the performance of the largest facilities in the leveraged loan market.
The West Texas Intermediate (WTI) oil, also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content.
Bloomberg Commodity Index (BCOM) is calculated on an excess return basis and reflects commodity futures price movements.
This report has been prepared for informational purposes only. It is based on information generally available to the public from sources believed to be reliable. No representation is made that information is accurate or complete. Any opinions expressed are subject to change without notice. Past performance is not indicative of future results. Yields are subject to market fluctuations. Additional information is available upon request.