Third Quarter 2022 Market Commentary

U.S. Gross Domestic Product (GDP) declined at an annualized pace of 0.6% in the second quarter, a slower rate than the 1.6% decline in the first quarter. While still a decline, U.S. GDP’s decline benefited from an increase in consumer spending, an upturn in exports, and a small decrease in federal government spending relative to the first quarter. The ‘advance’ estimate for third-quarter GDP will be released on October 27. Nonfarm payrolls rose by 263,000 in September as the unemployment rate declined to 3.5% and wages grew at an annual rate of 5.0%. Meanwhile, consumer confidence improved in September from the previous month, driven by higher job numbers and wages and declining gas prices.

Core CPI, which excludes food and energy prices, rose by 6.6% in the 12 months through September, a 0.6% increase for the month. Core CPI’s 12-month gain is the largest yearly increase since 1982. Headline CPI, which includes all items, rose by 8.2% from a year ago, led by increases in shelter, food, and medical care prices, though partially offset by decreases in gasoline prices. Inflation continues to exceed the Fed’s long-term target of 2%. The Fed has raised the benchmark interest rate by 3.0% since March to get prices under control, including three consecutive 0.75% interest rate hikes, and has indicated it is expected to raise rates by at least 1.25% by the end of the year. With the release of September inflation numbers, expectations have shifted upwards as a 1.5% rate hike by year-end becomes more probable. Additionally, the Fed has been reducing the number of bond holdings on its balance sheet, known as quantitative tightening.

The Bloomberg U.S. Aggregate index fell 4.8% in the third quarter, as 3-month T-bills were the only positive performing sector, up 0.7%. Developed international and long government/credit bonds underperformed all other fixed income sectors for the quarter, down 10.2% and 9.0%, respectively. The yield on the 10-year Treasury note ended the third quarter at 3.83%, while the 30-year Treasury bond ended the quarter with a 3.79% yield.

The S&P 500® index continued its decline in the third quarter, down 4.9%, though at a less severe rate than in the second quarter when it was down 16.1%. The consumer discretionary and energy sectors were the only positive contributors, up 4.4% and 2.3%, respectively. Meanwhile, the communication services and real estate sectors got hit the hardest, down 12.7% and 11.0%, respectively. Growth outperformed value across the capitalization spectrum, a reversal from the previous quarter. The forward P/E for the S&P 500® ended the quarter at 15.2x, below the 25-year average of 16.8x.

U.S. equity led most developed international and emerging markets (EM) for the quarter, despite all experiencing negative returns. The MSCI World ex-USA index, which includes developed countries, fell 9.1%, and the MSCI ACWI ex-USA index, which includes developed and EM countries, was down 9.8%. EM equities declined by 11.4% as all major markets saw negative returns, except for Latin America, which was up 3.7%. China continues its decline, down 31.1% year-to-date.

Commodities continue to outperform all asset classes year-to-date, up 13.6%, as all remaining asset classes besides cash have had significant negative returns. Within the Bloomberg Commodity Index, the energy sub-index had the largest year-to-date increase, up 48.3%, as natural gas prices have increased 85.1% in 2022. Meanwhile, industrial metals and precious metals both had prices decline, down 17.0% and 10.9%, respectively, year-to-date.

Download Q3 2022 Capital Markets Review

In addition to our Capital Markets Review,  Scott Cameron, principal and a member of our Investment Committee, provides an overview of investment market performance through early October, discusses the current economic environment, reacts to the Fed's response to the current economy, and reviews the major impact it is having on capital markets in this short video.


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