Consumer confidence is marginally up from all-time lows at 58.6, while personal income, consumption, and labor force participation all climbed in September, painting a favorable economic picture when taken alone. But "hawkish" Federal Reserve policies meant to slow the economy are likely to stay in place as long as core inflation remains high (+6.2% Core PCE).
In 2022, the S&P 500 index returned to its level at the beginning of December 2020 after suffering losses across sectors, as U.S. large-cap stocks dropped more than 9% in what has become a typical September for equities markets: Only protective healthcare equities fell by less than 7.5 percent, at -2.6%. The majority of analysts have reduced their forecasts for quarterly profit growth since the beginning of 2020.
Foreign stocks and developing countries have faced a significant currency hurdle because to the enormous 2022 dollar rise. Foreign stock returns were reduced by around 3% in September due to currency translation. The new prime minister of Great Britain, Liz Truss, suggested lowering taxes and easing fiscal policy, which caused the pound to approach parity with the dollar.
Despite a brief respite in early October, 10-year US Treasury rates surged 80 basis points to 4.0%, further deepening the bond market meltdown. As a possible indicator of market surrender, bond market volatility surged to levels not seen since 2008, during the global financial crisis, while many investors were expecting stock market volatility to peak before declaring a market bottom.
Despite generally unfavorable financial markets in 2022, real assets have been a decent diversifier up to September. Every major commodities sector went into the red as investors fretted about a potentially slowing global economy. As interest rates rose, making bonds a more appealing income option, real estate investment trusts (REITs) continued their decline.
Market volatility has been beneficial to absolute return hedging techniques, while the rising trend in interest rates has been beneficial to managed futures strategies. While stock-biased strategies did not do as well in September due to the fact that hedges could not completely counteract the severity of the market selloff, they did better than conventional equities and fixed income strategies in terms of absorbing shocks.
As a sarcastic curse, you can say something like, "May you live in interesting times" to your nemesis. The idea is that it's preferable to live through periods of relative calm rather than times of great upheaval, like the one we've been through since March 2020 and, from a market standpoint, this year so far. Certainly, the current macroeconomic and financial climate has few historical parallels.
The reduction in the world's money supply is an underappreciated but crucial factor in the terrible market performance in 2022. With interest rate hikes in March and asset sales on the balance sheet beginning in May, the Federal Reserve has been effectively cutting off two sources of monetary assistance since this spring. Following the enormous infusion of funds to counteract the economic effects of COVID-19, the subsequent decline in liquidity is shocking. The most significant threat that we see is the Federal Reserve's deftness in balancing these two actions so as not to freeze the economy or cause havoc in the financial markets.
Inflation is pretty high and monetary policy is much tighter, which is having a negative effect on bonds and equities at the same time. Consequently, the traditional 60/40 stock/bond portfolio has lost about 21% so far this year as of September. This would be the worst calendar year for 60/40 in at least fifty decades if it became the full-year return for 2022. Additionally, public market investments' long-term performance outcomes (the last three, five, and ten years) have been impacted by the 2022 bear market, which is happening fourteen years after the global financial crisis in 2008. These results were looking much better nine months ago.