October 2022 Market Commentary: Looking Past the Peak
Data Source: Bloomberg
To read full market commentary, click here.
October 2022 Highlights:
- October saw a recovery in global risk assets with developed market equities, risky fixed income, and commodities leading a counterrally from the deep sell-off at the end of the 3rd quarter. A combination of 1) global central bank intervention to arrest U.S. dollar strength, 2) stronger-than-expected earnings growth from U.S. cyclicals/financials, and 3) expectations the Federal Reserve would follow other central banks (notably Canada and Australia) in slowing down rate hikes contributed to this month’s risk-on sentiment.
- In October, the MSCI All-Country World Index (ACWI) returned 6.0%. Across major regions, Emerging Markets and broader Asia underperformed the U.S. and Europe, largely driven by a sell-off in China’s equity markets following leadership changes announced at China’s Party Congress. The S&P 500 Index returned 8.1% and MSCI Europe returned 7.2%, outpacing the 3.0% return of MSCI Japan, while MSCI Emerging Markets and MSCI Pacific ex-Japan were down for the month, returning -3.1% and -4.2%, respectively.
- MSCI China dropped 13.5% as overseas investors drove the selling pressure following the high-profile Party Congress deliberations. Asian currency depreciation versus the U.S. dollar also weighed on Asian market performance.
- Within the U.S., U.S. smalls caps outperformed large caps as the U.S. equity market recovery was broad-based, while value stocks outperformed growth stocks, as the latter suffered from earnings misses released this month by some high-profile technology growth companies. The S&P 600 Index returned 12.4% versus 8.1% for the S&P 500. S&P Pure Value outperformed Pure Growth, returning 13.0% versus 7.9%.
- Across sectors, Energy handily outperformed the other sectors helped by a recovery in energy prices as well as strong earnings releases from notable major integrateds. Industrials and Financials also outperformed helped by better than expected earnings releases while interest rate-sensitive sectors such as Utilities and Real Estate underperformed as rate volatility spiked in October. Earnings disappointments from high profile growth stocks helped drag down the Consumer Discretionary and Communication Services sectors
- Among Risk Factors, Momentum and Value outperformed helped by exposure to cyclicals and financials while High Quality and Minimum Volatility lagged hurt by a combination of renewed risk appetite and earnings disappointments from highly profitable companies.
- Investment grade fixed income continued to be hurt by rising interest rates and rate volatility as well as widening risk premiums priced across securitized lending and corporate credit. The 10-Year U.S. Treasury Yield rose as high as 4.3% but then declined to end the month at 4.0%. The Bloomberg U.S. Aggregate Bond Index dropped 1.2% for the month while the Global ex-U.S Aggregate returned -0.1%. Non-U.S. bonds outperformed helped by a recovery in European currencies versus the U.S. dollar as well as lower relative rates versus the U.S.
- S. high yield benefited from the U.S. equity rally as credit spreads briefly narrowed below 5% before widening just above that level. The Bloomberg US High Yield Index returned 2.6%, while Bloomberg/Barclays Emerging Market Debt LC returned -0.8% as local currency debt tends to be shorter maturity versus U.S. dollar-denominated debt.
- Within equity alternatives, Commodities recovered from the 3rd quarter sell-off, helped by a recovery in energy prices along with agricultural prices. The S&P GSCI Commodities Index returned 6.7% for the month while Dow Jones REIT Index rose 3.5%, lagging the broader equity market advance as higher interest rates continue to weigh on real estate valuations. The S&P GSCI Precious Metals Index dropped 1.4%.
- The outlook beyond the ‘peak’ remains murky, but investors are also being compensated with more attractive risk premiums across equities (valuations) and fixed income (interest rates). The bottom does not appear to be falling out despite fears that the Fed runs the risk of ‘breaking something’ through overtightening. Volatility and liquidity conditions will likely remain challenged until some clarity on the inflation front serves as a catalyst for future policy paths.
To read full market commentary, click here.
By: Benjamin Lavine