The S&P 500 finished September, historically the month with the worst seasonals for equities, down –9.34% at a new bear market low. Q3 illustrated the extent to which markets are being dictated by one factor: Fed policy. Hopes that the Fed could cut rates next year drove the rally through mid-Aug., but markets were roiled over the balance of the quarter by further hawkishness from the FOMC. Growth outperformed value for the quarter, but a slowing economy and higher rates meant there was nowhere to hide. Europe fared about as poorly as the U.S. in local currency terms, though the soaring USD sent them down nearly –12% in dollar terms.
The Fed continued its aggressive tightening campaign in Q3, hiking rates 150bps to total 300bps for the year with an additional 125bps expected in Q4. The DXY dollar index hit a 20-year high and benchmark yields have surged. The 2-year jumped 122bps last quarter, rising above 4% for the first time since 2008, while the 10-year, driven largely by rising real yields, climbed at its fastest pace in four decades, briefly hitting 4% last week. Heightened volatility in the Treasury market has coincided with plummeting returns in the Bloomberg Agg which shed –4.75% in Q3. HY followed the rocky path equities took, ending Q3 down –0.65%.
Oil prices plunged in September and Q3 as the demand outlook deteriorated. Renewed COVID lockdowns in China and hawkish central banks sent WTI below $80/bbl for the first time since January. Gasoline prices fell –22% in Q3 but have risen recently. Natural gas in the U.S. and Europe have moved in concert over the past few months given the surge in LNG shipments from the U.S. to Europe. Gold declined
–8.02% in Q3 as real rates soared.
Last week, data reinforced key economic themes of Q3: Persistently high inflation, slugging growth, and a robust labor market. The PCE deflator – the Fed’s preferred inflation measure – rose 0.3% m/m, but excluding food and energy accelerated to 4.9% y/y (Cons 4.7%). Meanwhile, real personal spending was lackluster in Aug. revised down for July, chipping away at the odds of a positive growth outcome in Q3 real GDP. Meanwhile, initial jobless claims fell to 193,000 in the week ending Sept. 24.
Source: Bloomberg Finance, L.P., as of 12:00pm, September 30, 2022.