Third Quarter 2022 Market and Economic Review
On September 21st, the U.S. Federal Reserve met and, once again, raised its federal funds rate by another 0.75 percentage points. The increase marked the fifth rate increase for the year (third consecutive increase at 75 basis points) and moved the target rate range to 3.0 – 3.25 percent.
The increases are all in an effort to temper an overly hot economy and reverse skyrocketing inflation. So far, the increases have had only moderate success at curbing inflation leaving most economists to believe more increases are on the horizon in the fourth quarter.
Even though the economic response thus far has been less obvious, the reaction in the markets has been more apparent. U.S. markets in both large- and small-cap indices have shown consistent and widespread drops in value. The declines have been fairly consistent since mid-August and finished the quarter at some of the lowest points in the past two years.
The large U.S. publicly traded companies, as measured by the S&P 500 index, fell 4.88 percentage points for the quarter and were down 23.87 percent for the year. Similarly, the Russell index (which measures smaller U.S. companies) saw declines of 2.19 percent for the quarter and were down 25.10 percent for the year.
And, U.S. bonds also continued their steady decline with a 4.75-percent drop in the quarter. That brought the year-to-date decline to 14.61 percent at the close of September.
Due in large part to Russia’s attack on Ukraine and lingering pandemic issues (particularly in China), inflationary turbulence is being felt worldwide. Of note, the British pound and the Euro have lost considerable ground to the U.S. dollar. With Russia cutting fuel and energy supplies to much of Europe, there is growing concern about how those countries will operate and keep warm during the upcoming winter months. As a result, the MSCI EAFE (which measures developed nations in Europe, Australasia, and the Far East) was down 9.29 percent for the quarter and down 26.76 percent for the year.
* Each benchmark is allocated based on the assumed Risk Profile of underlying indexes.
**Benchmarks include a mixture of ICE BofA US 3-month Treasury Bill Index, Bloomberg Global Aggregate X-US Index, Bloomberg US Aggregate Index, Bloomberg Multiverse Index., Bloomberg US Credit Index, MSCI EAFE Net Index, Value Line Composite Index (Geometric), and the Cboe S&P 500 BuyWrite Index. These benchmarks are the same as those in the Risk/Return and Account Analytics sections of client quarterly performance reports. By comparing your portfolio’s return to the benchmark with the closest risk/return characteristics, you get a more accurate reading of portfolio performance than using a less diversified benchmark, such as the S&P 500 index.
Though a change in course for inflation has been less visible than market reactions, there are some positive signs. Larger ticket purchases have slowed in recent months – primarily on home purchases and automobiles. And the value of the dollar has climbed, which helps prices domestically even though it creates challenges for international economies. And, in general, some commodities have seen prices come down.
Still, inflationary signs persist in areas like food prices, wages, and a very tight labor market.
Because the Fed’s changes in their funds rate have not produced a foreseeable end to the present inflationary environment, we’re beginning to see a change in attitude from the Federal Reserve Board – particularly from Board Chair, Jerome Powell.
In the first quarter of this year, as the Fed began looking at making changes to their policy, the sentiment was that some increases would be needed but if the inflation rate responded quickly those increases could be tapered back to allow for a ‘soft landing’ as the economy came into balance. That is, any recession created would be mild and fast recovering. There was even some speculation that cuts to the Fed rate may be possible during the course of 2023.
Coming out of the September meeting, Chair Powell’s comments were more hawkish on the policy requirements likely needed to restore price stability. In response to a question at his press conference, Powell stated, “the chances of a soft landing are likely to diminish to the extent that policy needs to be more restrictive or restrictive for longer.”
In his opening remarks, Powell said, “over the coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2 percent. We anticipate that ongoing increases in the target range for the federal funds rate will be appropriate.”
These comments, along with the policy adjustments, have most economists believing more rate increases are imminent and the idea of cuts in 2023 has been set fully aside. There is also a sizeable school of thought that we’re finally getting the medicine our economy needs following an overly cautious and late start in responding to the red-hot economy that developed in 2021. As always, we are happy to answer any questions you may have.