Source: Morningstar. Past performance does not guarantee future results. All data is from sources believed to be reliable but cannot be guaranteed or warranted. Please see disclosure at the end of commentary for limitations to index performance.
EQUITIES
Equities posted a strong run through July and the first half of August but surrendered those gains in the second half of the quarter and ended down across the board.
•All three major U.S. equity indexes have fallen into bear market territory, with the S&P 500 and NASDAQ on a three quarter losing streak
•Central banks around the globe followed the Fed’s lead in raising rates, and international and emerging market equities suffered. (Morningstar Direct, as of Oct 1, 2022)
FIXED INCOME
Bond markets also continued to struggle and were firmly down for the quarter.
•The Bloomberg U.S. Aggregate bond index—predominantly U.S. Treasury’s, highly rated corporate bonds, and mortgagebacked securities—continued to post negative performance.
•The Bloomberg Barclays Global Aggregate Index, representing bonds from both developed and emerging markets, ended down over 5% for the quarter. (Morningstar Direct, as of Oct 1, 2022)
Factors
Exposure to investment risk factors was something of a mixed bag this quarter. While several factor exposures outperformed markets on a relative basis – Minimum Volatility, Value, and Momentum – all were negative for the quarter. (Morningstar Direct, as of Oct 1, 2022)
NEWS Impacting Markets
Inflation
Data suggests the overall pace of inflation has cooled a bit, led by a significant decline in gasoline prices over the quarter. However, August’s Labor Department’s CPI report indicated that higher inflation levels have become more embedded across the overall economy, particularly in food and housing. Consumers have had some relief when filling up their gas tanks, though not when filling up their grocery baskets or paying rent, and as long as that persists, this issue will continue to dominate headlines.
The Fed
Combating Inflation has become the primary focus for the Fed. The Federal Open Market Committee (FOMC) — the panel of Fed officials responsible for monetary policy— hiked its baseline interest rate by 0.75 percentage points for an unprecedented third consecutive meeting in mid-September. Fed officials have pledged to keep ramping up rates to tame inflation before it spirals any further out of control. However, market participants are doubtful that the Fed can do so without derailing the steady economic growth and low unemployment of the post-pandemic period, and fears of recession loom.
The Strength of the US Dollar
Due to a combination of the Federal Reserve’s actions raising rates and a host of economic concerns across the globe, there has been a strengthening of the US dollar relative to other currencies, and the dollar has surged to historic highs against the British pound, the Japanese yen, and other currencies. As the dollar is the main currency used in trade (ex: commodities like food and oil are usually priced in dollars), this has had a global economic impact. One benefit to US consumers is that this makes imported goods cheaper; the flip side of that coin is that US exports become more expensive for international buyers, who tend to curtail their purchases as a result. This can wreak havoc with the profits of US companies that do a lot of business overseas (roughly 40% of the revenue for S&P 500 companies comes from outside of the US). The expected decline in earnings can put downward pressure on valuations – causing the price of stocks to fall.