Every quarter, Canterbury's Outsourced CIO committee shares their observations of the market that impact the management of our discretionary portfolios in the Canterbury Outsourced CIO Commentary.
For the third consecutive quarter, both stocks and bonds declined in tandem. The S&P 500 fell 5.3%, the 10-Year Treasury rose 85 basis points, and 2-Year Treasury yields rose 130 bp, resulting in the most inverted yield curve in several decades. The U.S. Dollar appreciated for the fifth straight quarter, increasing 7%. At the same time, crude oil and gold fell more than 20% and nearly 8% respectively.
Amidst the noise of dismal market returns lies the concern of whether the tightening of financial conditions, which are driven by expectations of a more aggressive global rate hike cycle, will lead to a recession. Should a recession occur, many are still unsure if it will be a mild one or a true “hard landing”. Despite short-term interest rates increasing by over 300 bp, a low unemployment rate of 3.8%, stable home prices, healthy income gains, and manageable debt servicing have prevented a recession so far. To date, credit spreads have not blown out, which often occurs heading into a recession. With high yield option-adjusted spreads at 5.5% at the end of September 2022, corporate fundamentals still reflect stability. Thus, even though we are experiencing an inverted yield curve, which is a harbinger of impending recession, it may be too soon to consider a recession to be a foregone conclusion.