Third Quarter 2022 Market Snapshot

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Third Quarter 2022: Wake Me Up When September Ends

Hotter-than-expected inflation downed hopes of a sustained market rally during the third quarter, as equity and fixed income markets sold off in tandem. Global stocks began the quarter with a modest rise, as financial conditions loosened on the promise of an economic soft landing whereby inflation could cool while economic activity only slightly slowed. Those hopes were dashed as broad-based inflation readings remained high, and a subsequent uncharacteristically succinct speech from Federal Reserve Chair Jerome Powell suggested “some pain” would be necessary if inflation is to be tamed. The reaction from the market was significant; the stock market fell precipitously in September to close at a new low for the year. Even with the stock market entering bear market territory, the real story thus far this year has been fixed income markets, which have suffered the worst losses in a century as yields have risen. The Bloomberg US Aggregate’s current drawdown is now its worst, and longest, on record.

Rising rates, which have slowed the previously red-hot housing US market, are now starting to have knock-on effects abroad. The relative strength of the US economy, a dour outlook for Europe, and higher yields stateside have increased the attractiveness of the US dollar, pushing it to parity with the euro. The strong dollar impact has been felt sharply in the United Kingdom where an ill-received, and quickly scrapped, economic policy proposed by new Prime Minister Liz Truss’s government led to a sharp sell-off in sterling and UK government bonds. The large market moves forced the Bank of England to pivot away from plans for continued tightening and instead purchase long-dated government debt to stave off potential solvency issues for several large UK pension plans. A full-scale financial crisis was held off, for the time being, but the issue highlights the tightrope that global central bankers are walking on: leaning too far into tighter policy increases the possibility of a hard landing. But leaning too far in the other direction risks that inflation becomes sticky and inflation expectations become entrenched, requiring even greater pain down the road. Markets, meanwhile, reflect higher uncertainty while this high-wire act plays out.