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Market Commentary

3rd Quarter 2022 Market Commentary: Financial Instability Risk > Inflation Risk

Data Source: Bloomberg

To read full market commentary, click here. 

September 2022 Highlights:

• Global markets came under increasing pressure as prospects of Federal Reserve tightening increased the risks of financial instability even as global inflation pressures remain elevated. Global equity markets and risk assets took a turn for the worse towards the end of September as the energy crisis across Europe weighed on government and consumer finances as well as private bank balance sheets experiencing a markdown in collateral values.
• Broader Asia also came under pressure over concerns of a currency ‘contagion’ stemming from a U.S. dollar wrecking ball, a slowdown in global trading activity, and ongoing domestic growth pressures in China, grappling with the fallout of the collapse across its property sectors. China came under pressure as the USD/CNY currency ratio crossed the psychological barrier of 7.0 even as government bond yields rose as Asian bond yields struggle to keep up with rising European and U.S. yields.
• In September, the MSCI All-Country World Index (ACWI) dropped 9.6%. Across major regions, MSCI Europe (-8.7%) and the U.S. market (S&P 500 -9.2%) outperformed MSCI Japan (-10.4%), MSCI Emerging Markets (-11.7%), and MSCI Pacific ex-Japan (-12.6%). MSCI China dropped 14.6% for the month.
• Within the U.S., U.S. large caps narrowly outperformed small caps, as both broad market indices grappled with the prospects of tightening central bank policies, a meaningful economic slowdown, and uncertainty over prospective earnings growth. Growth edged out Value as the former benefited from a handful of safe-haven consumer brand name stocks while the latter was hurt by a sell-off in industrial and commodity cyclicals. The S&P 500 Index returned -9.2% versus -9.9% for the S&P 600 Index. S&P Pure Value underperformed Pure Growth, returning -9.1% versus -8.9%, respectively.
• Across U.S. sectors, Healthcare outperformed helped by headlines over promising drug therapies as well as benefiting from higher prices for medical treatments and services. Cyclical sectors across Growth (Info Tech, Communication Services) and Value (Energy, Materials, Industrials) underperformed as did interest rate sensitive defensive sectors (Utilities, Real Estate).
• With the exception of High Quality, Risk Factors outperformed the broader U.S. market with Momentum and Minimum Volatility leading factor performance.
• Global interest rates were especially volatile in September for most bond markets (the exception being Japan), as investors sold off U.K. Gilts in reaction to proposed budget blueprint from the incoming Truss government containing unfunded tax cuts on top of higher spending on energy subsidies. September saw a swing in U.S. Treasury rates with the 10-Year U.S. Treasury Yield rising as high as 4.0% amidst the panic flight out of U.K. Gilts before settling near 3.8% at the end of September.
• S. investment grade (Bloomberg US Aggregate) dropped 4.3% due to a combination of higher rates and wider spreads across corporate and MBS/ABS sectors. The Bloomberg/Barclays ex-U.S. Aggregate Bond Index dropped 5.9%, as overseas bond markets were hurt by a combination of higher rates and an appreciating U.S. dollar.  U.S. high yield and emerging market debt also poorly performed this month in sympathy with the sell-off of global risk assets.  The Bloomberg / Barclays US High Yield Index returned -4.0%, while Bloomberg/Barclays Emerging Market Debt Local Currency dropped 5.2%.
• Within equity alternatives, it was a volatile month for real estate which saw an initial rally only to turn sharply negative throughout the rest of September weighted down by higher interest rates and tighter financial conditions. The Dow Jones REITs Index dropped 12.7% in September, underperforming the broader U.S. equity sell-off. The S&P GSCI Commodities Index dropped 7.8% while S&P GSCI Precious Metals returned -2.1%. Industrial metals and energy sold off in the third quarter over concerns of demand destruction from central bank tightening and ongoing Zero Covid lockdowns suppressing China’s industrial appetite.
• As financial uncertainty rises along with risks to financial stability, global central banks are being pushed to give greater weight to these risks as opposed to ongoing inflation. Greater uncertainty over the growth outlook combined with higher interest rates have brought down forward price/earnings multiples – investors are demanding a higher premium for greater economic uncertainty and competition from higher risk-free rates.

To read full market commentary, click here.