The U.S. equity markets fell in the quarter following a short-lived market rally in July. Recession fears, persistent inflation pressures, and Federal Reserve monetary policy tightening weighed heavy on markets, continuing the downward trend that started in the first half of the year.
European equities and emerging markets (EM) equities fell more significantly in the quarter. The Eurozone’s ongoing energy and economic concerns and rising inflation were headwinds for the region. Additionally, the euro’s 20-year low versus the U.S. dollar significantly impacted returns.
Amid growing inflation, the Federal Reserve raised the key interest rate twice, 75 basis points in July and 75 basis points in September to a range between 3.0% - 3.25%. The FOMC has increased their fed funds rate forecast range from 3.25% - 3.5% to 4.0% - 4.5% by year-end. Chairman Powell communicated that he is prepared to move more quickly to reduce policy support if inflationary pressures continue, even though it may lead to a recession.
The treasury yield curve increased across all maturities, particularly on the short-end. This has caused an inverted yield curve between 2-year and 10-year maturities. Investment grade (IG) spreads remained relatively stable at 167 basis points (bps) over the quarter while high yield (HY) spreads narrowed by 44 bps to 543 bps. Bonds are on track for their worst performance on record, surpassing the lows of the 1970’s and 1980’s.
Inflation, measured by CPI, remained persistently elevated over the quarter, reaching a high of 8.2%. CPI excluding food and energy, generally viewed as sticky inflation or Core CPI, increased by 6.6% year-over-year (YoY) for the month of September. Indicators used to measure U.S. economic activity such as the ISM Manufacturing and Non-Manufacturing indexes, declined over the quarter. As a result, concerns of a slowing economy increased.
To view the third quarter reports, click on the links below: