Quarterly Market Review 2022 Q3

The year continues to be marked by volatility in both the stock and bond markets. The Russian invasion of Ukraine continues to disrupt global markets and inflation is significant and stubborn both in the U.S. and around the world. In the U.S., the Federal Reserve's no-holds-barred approach to increasing the Federal Funds rate still has investors concerned about the possibility of recession.Inflation will need to start coming down quickly for markets to begin turning around. It will likely take some time for that to happen, and we expect the volatility to continue in the coming months. A few interesting data points from Q3:

• The U.S. stock market is down for the third quarter in a row, down -24.9% since Jan 1 - its worst performance (year-to-date) in 20 years. 

• Two-year U.S. Treasury yields ended the quarter at 4.22%, up from a mere 0.27% this time last year.

• The October U.S. consumer price index (CPI) report marked inflation at 8.2%, which was higher than expected.

• The yield curve is still inverted, meaning the 2-year Treasury yield is higher than the 10-year Treasury yield, indicating expectations of shorter-term risk and volatility.

  
  

Below is a snapshot of key top-line economic indicators:

Here is a market summary of third quarter 2022 returns:

U.S. Stocks

U.S. stocks saw continued volatility, starting with a positive summer swing up +14.5% by mid-August, erasing half the losses suffered through mid-June. That ended quickly, with inflation continuing to persist at higher rates than expected, and despite the summer reprieve, U.S. stocks finished down -4.6% for the quarter, and down -24.9% so far in 2022.  

International Stocks

International markets, both developed and emerging, posted negative returns for the quarter and underperformed the US market. The U.K. experienced its worst quarter in history in Q3, with its new government announcing plans for tax cuts and government borrowing, two acts that will only exacerbate inflation challenges. The British Pound was heavily impacted and is now nearing parity with the U.S. dollar.

Fixed Income

Almost all bonds suffered losses in Q3, continuing the historic losses from the first half of 2022. Beneath the bond market turmoil has been the Federal Reserve's unprecedented aggressive interest rate hikes and the resulting increase in bond yields (and corresponding price declines, as bond yields and prices move in opposite directions). While it has been the worst year in the history of the bond market, the silver lining is that bond yields are up significantly. Rates won't increase forever, and once rates stop going up, bond prices will stop going down.

The Federal Reserve bumped up the Federal Funds Rate by 0.75% in July, September, and again this week. The Fed Funds rate is now 3-3.25%, the highest it has been since 2008, and the market expects another 0.75% increase in November. For historical context, prior to June of this year, the Fed had not raised interest rates by 0.75% since 1994, and has raised it by 0.75% now three times already this year.