Stocks and bonds both were down for the third quarter after rallying in July. The hope that the Federal Reserve would ease its interest rate hikes was quickly shut down when the Fed and other central banks around the world reiterated their commitment to taming inflation. The Fed raised rates twice in 0.75% increments during the quarter.
Related: When Will We Hit Peak Inflation?
Equities
US Stocks continued their slide in Q3 after logging a red first two quarters of 2022. The Dow Jones Industrial Average fell the furthest domestically with a -6.17% decline in the third quarter. Worldwide equity performance was worse, with the MSCI Emerging Markets index tumbling 11.42%.
Only two of the eleven S&P sectors posted a positive return during Q3. Consumer discretionary and energy were up 3.83% and 1.81%, respectively. The other nine sectors were all in the red with communication services and real estate falling the furthest, -11.57% and -11.07%, respectively.
Fixed Income
The third quarter of 2022 brought more action in the yield curve. Treasury Rates continue to rise across the board, and by so much in the short end that the yield curve has flattened past the point of inversion.
The 5-Year Treasury Rate ended Q3 at 4.06%, greater than both the 10-Year Rate’s 3.83% yield and the 30-Year’s 3.79%. November 2007 marked the last time the 5-Year was above 4%. An inverted, and flatter, yield curve can indicate uncertainty about economic growth in the long term. The 10-2 Spread ended the quarter with a differential of -0.39%.
Related: Should You Add Fixed Income Investments to Your Portfolio?
Trade Rationale
We have been strategically cutting risk and cutting back active shifts (exposures that deviate from the benchmark) since the middle of last year, because of heightened market risks as the Fed began its tightening campaign. These proactive moves have helped amidst one of the most challenging periods for investors in modern history, with both stocks and bonds concurrently falling into bear markets.
We aren’t outright bearish and intend to remain patient given the mixed evidence available, waiting for stronger signals to emerge before re-risking.
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