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Key Takeaways, Third Quarter 2022
By Ralph Goldsticker, CFA | Oct 2022
Inflation is down from its peak—but remains elevated and continues to be a concern. A challenging quarter saw P/E multiples contract and interest rates rise. Stocks and bonds fell significantly, compounding year-to-date losses. The Fed Funds rate was increased 75 bps in July and September, a total of five increases so far in 2022.
The Fed’s language signaled that its top priority is bringing inflation under control, and that rate increases will continue even if it triggers a recession. For some, this signaled the Fed is “behind the curve” and that recent high inflation will persist. For others, it triggered fears that future rate increases may result in a hard landing (i.e., recession).
Longer-maturity interest rate levels, TIPS market break-even inflation rates, and economists’ surveys all suggest that the recent high inflation will be contained. Unemployment remains low, and job growth steady. Forecasts of corporate earnings held up as well, suggesting that security analysts are not forecasting a recession.
Equities
As in the first two quarters, both US and international stocks fell. The broad US market fell 4.5%, developed international 9.4%, and emerging markets 11.6%. YTD they are down 25%, 27% and 27%.
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The appreciation of the dollar contributed to the negative returns of international stocks.
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US growth stocks modestly outperformed the broader market losing 3.6%, while value stocks fell 5.6%
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There was a large divergence across sectors. Real Estate fell 11% hurt by higher interest rates. Communication Services fell 12% hurt by contracting P/E multiples. Energy gained 3.4%.
Fixed Income
Treasury interest rates rose. Investment Grade (IG) credit spreads widened modestly, and High Yield (HY) spreads narrowed. Bond prices of all but the shortest maturities fell.
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The yield on 10-year Treasury bonds touched 4% for the first time since 2011, before finishing the quarter at 3.83%. It is up 85 bps during the quarter, 2.31% YTD, and 3.31% from the end of March 2020.
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The aggregate US bond market fell 4.8% and is down 14.6% YTD.
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IG bond spreads widened by 4 bps and HY narrowed by 17. IG spreads are now 57 bps wider than their pre-pandemic level; HY 2.16%.