Third Quarter 2022 Update

October 17, 2022

Key Points

• In its effort to assertively combat surging inflation, the FOMC raised its federal funds rate target range twice during the quarter, to 3%-3.25% from a range of 1.50% to 1.75%
• Recession now seems likely if the economy has not already entered one, and investors are becoming anxious, liquidating stocks and sending broad-based indices into a bear market.
• While there are a few bright spots in the data, including robust employment reports, economists remain subdued regarding the outlook for the economy, citing uncertainty on the supply chain and inflation fronts, as well as an increasingly volatile geopolitical environment.

3rd QUARTER 2022 MARKET COMMENTARY

Below, we’ve highlighted 2022 broad market returns for the third quarter and year-to-date time periods:

Source: Refinitiv

THE GLOBAL ECONOMY

The US economy continued to have difficulty in the quarter, as surging inflation and the effects of central bank efforts to tame it, have caused growth to turn negative. Against this backdrop, the Bureau of Economic Analysis released the third estimate of the second quarter 2022 real GDP, a seasonally adjusted annualized decline of 0.6%, in line with the prior estimate, and a slight improvement from the 1.6% decrease in the prior quarter. The employment situation continued to show a strong trend in the quarter, as gains modestly exceeded expectations. The August report showed that employers added 315,000 jobs in the month, and that the unemployment rate rose to 3.7%. The Federal Open Market Committee (FOMC), in an effort to aggressively battle surging inflation, twice raised its federal funds rate target range in the quarter, to 3.00% to 3.25%, from a range of 1.50% to 1.75%. The 75-basis point increase on September 21st was the third this year, and many economists expect the FOMC to continue to aggressively raise rates until inflation is under control.

EQUITIES

The decline in stock prices experienced during the first two quarters extended into the third quarter as the FOMC remained aggressive in raising interest rates to combat historically high inflation. Recession now seems likely if the economy has not already entered one, and investors are becoming anxious, liquidating stocks and sending broad-based indices into a bear market. In addition, supply chain bottlenecks remained, as have the issues in the energy and agriculture segments resulting from the ongoing war in Ukraine. The S&P 500 began the quarter by rising steadily, reaching its peak in mid-August, but then experienced a steady decline into the end of the quarter.  Many major stock indices ended the quarter in bear market territory (a decline of at least 20%). When the quarter ended, the S&P 500 Index had declined 4.9%, and is down 23.9% year-to-date. International stocks also generated very poor results during the quarter, and generally perform in line with US equities. The MSCI EAFE Index of developed markets stocks were lower by 9.4% and the MSCI Emerging Markets Index fell by 11.6%.

FIXED INCOME

Fixed income securities’ prices were materially lower (and yields higher) for the second consecutive quarter, as inflation stubbornly remained near 40-year highs. The Bloomberg Municipal Bond Index shed 3.5% and the Bloomberg US Credit Corporate 5-10 Yr. Index sank by 4.7% during the quarter.   The Federal Open Market Committee (FOMC) continued to move aggressively in removing accommodative monetary policy. In its effort to assertively combat surging inflation, the FOMC raised its federal funds rate target range twice during the quarter, to 3%-3.25% from a range of 1.50% to 1.75%. The 75-basis point increase on September 21st was the second one during the quarter. The committee’s statement accompanying the most recent increase indicated that the FOMC will continue to be aggressive in raising rates as appropriate, and will be focused on combatting inflation, even at the expense of job gains. Analysts are expecting the FOMC to implement another 75 basis point hike in November and a further 50 basis point rise in December. The FOMC’s “dot plot,” a forecast of future rate changes, indicates the committee now expects the fed funds rate to be at 4.4% at the end of this year, and 4.6% at the end of 2023.

SUMMARY

The global economy is currently teetering on the brink of recession after having delivered a strong post-pandemic recovery. Decades-high inflation caused by supply shortages and rising commodity prices – as well as an aggressive central bank policy response – is undoing the global expansion. In addition, China’s economy is facing many challenges, led by a cooling property market. Despite the recent slowdown, analysts expect the global economy to end up with modestly positive growth at year end. Prices have increased for 12 consecutive months, and the inflation rate is at its highest level in more than 40 years. Three primary culprits for the spike in inflation are supply chain bottlenecks that persist from the pandemic lockdowns, the disruption of energy and food supplies resulting from the war in Ukraine, and the trillions of dollars in fiscal stimulus coursing through the economy. With a slowing world economy and high inflation economists are concerned about “stagflation.” While there are a few bright spots in the data, including robust employment reports, economists remain subdued regarding the outlook for the economy, citing uncertainty on the supply chain and inflation fronts, as well as an increasingly volatile geopolitical environment.

Information provided is for informational purposes only and should not be construed as investment advice. The views expressed are current only as of the publication date, are based on information that St. Clair Advisors believes to be accurate, and subject to change without notice. All investment decisions must be evaluated as to whether they are consistent with your investment objectives, risk tolerance and financial situation. St. Clair disclaims any liability for any direct or incidental loss incurred by applying any of the information in this publication. Indexes are unmanaged and one cannot invest directly in an index. Past performance is no guarantee of future results.

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