Further tightening by the Federal Reserve continued to pressure both equities and bonds in the third quarter. The market rallied over the first half of the quarter as investors anticipated the Fed may slow the pace of rate hikes or could pivot to rate easing in 2023, especially after a slightly better-than-expected July inflation report. However, the Fed quickly pushed back and communicated a “higher-for-longer” philosophy until inflation is brought under control, even if it causes some economic pain, which was underpinned by a hot August inflation report. Bond yields across the curve surged further in the quarter as well, with many shorter-term yields (1-5 Year) nearing 4.5% and the 10-Year almost touching 4.0% in the last week of the quarter, contributing to further bond underperformance.
Large-cap stocks underperformed small and mid-cap stocks, and growth modestly outperformed value in the quarter. Despite better performance in the 3rd Quarter, growth stocks still have underperformed value stocks on a year-to-date basis and we don’t expect a significant reversal until more certainty about the pace of inflation and subsequent rate hikes is achieved.
International developed and emerging markets finished down 9.6% and 11.4% in the quarter, below U.S. large and small cap indices. International and emerging market performance continues to be hampered by not only macroeconomic factors like accelerating global inflation, but also Russia’s ongoing invasion, and China maintaining its “Zero-Covid” approach with rigid lockdowns that impact the supply chain.
Inflation data and the Federal Reserve will remain the key focus of investors in the 4th Quarter, with market participants also keeping a close eye on economic data and signs that the labor market and economic growth are starting to cool after half a year of monetary policy tightening. We believe the Federal Reserve is nearing the end phase of the current rate hiking program, but near-term volatility will likely stay elevated as investors await more inflation and economic data.
While we expect near-term volatility, expectations and sentiment can shift quickly which is why we advocate for a diversified portfolio that prepares investors for a multitude of outcomes, as no one can predict the path the market will take from now. We know it’s hard to take a long-term view when volatility is elevated, but maintaining a balanced investment approach is critical for portfolio success.
|Index||3rd Quarter 2022||Year-to-Date|
|Dow Jones Industrial Average||-6.2%||-19.7%|
|Bloomberg Barclays U.S. Agg Bond||-4.8%||-14.6%|
|MSCI EAFE Index||-9.6%||-26.8%|
|MSCI EM Index||-11.4%||-26.9%|
Data as of September 30, 2022. Past performance cannot guarantee future results.
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