The first-half selloff across both stocks and bonds continued into the third quarter. Market indices vacillated between multi-week periods of euphoric speculation that the US Federal Reserve would tone down its hawkish speak, alternating to despair over economic reports highlighting persistent inflation and a doubling down of Fed rate-hike messaging. In the end, September closed at fresh lows for 2022. While the bear market for stocks has remained relatively well-contained with US Large-caps -23.9% to-date (‘SPY’ ETF Proxy), the unusual coincident occurrence of a bond bear left the Bloomberg Aggregate Bond Index down -14.4% (‘AGG’). This has been the worst retrace for the asset class in nearly 100 years (New York Times, “Bonds May Be Having Their Worst Year Yet,” 9/30/22).

There is no shortage of reasons for the pullback. First, stocks and bonds alike entered the year relatively overvalued based on near-zero interest rates and on the heals of tremendous fiscal and monetary stimulus from the Covid-era. Second, ensuing inflation, initially thought to be ‘transitory’ by the Federal Reserve, has ended up being ‘stickier’ than anticipated due to on-going labor shortages and supply chain disruptions. Third, the war in eastern Europe and China’s Zero-Covid policy have only exacerbated the problem among the energy and production arenas. Consequently, the Federal Reserve has held a stalwart hawkish rate stance throughout the year, quickly raising inter-bank lending rates. This has translated to the fastest increase in mortgage rates in history, with 30-year rates exceeding 7% (Zero Hedge, “30-Year Mortgage Rises Above 7% for The First Time Since 2000,” 9/27/22). When rates rise so dramatically, both stocks and bonds are subject to repricing and the economy typically slows – and this is precisely where we are at.

US Stocks (‘VTI’) retreated -4.5% during Q3, while overseas stocks were further set back by the war and a strong US Dollar, down -10.6% (‘VEA’). Making the year difficult for traditional portfolios, fixed income securities added to their annual losses, down another -4.7% (‘AGG’). Commodities also came in -10.3% (‘DBC’), hopefully presaging a decline in inflationary reads.

The outlook for markets remains dour going into year-end, although many indices are ‘due’ at least a temporary bounce. On one hand, markets will likely require some catalyst to begin a longer-term healing process. On the other, sentiment being as broadly low as it is, often precedes a turnaround. In addition, it is important for investors to recall that markets typically recover from their lows well in advance of the economy should we enter an official recession. Meanwhile, have a wonderful holiday season ahead, and be assured we continue to closely monitor markets during this volatile period.

Source: Index proxies based on dividend adjusted ETF time-series data from CSI Data, Inc. Data considered dependable, but not guaranteed. Past performance is no guarantee of future performance or profitability. Statements herein do not constitute individual investment advice.