ACG Market Review – Q3 2022

(Download the full report HERE)

Global Highlights

  • Economy – Persistent high inflation has dwarfed any positive economic data and pushed the Fed to an aggressive tightening cycle
  • Equities – Markets continue to re-price downward as investors struggle to interpret the path of monetary policy
  • Fixed Income – Further upward pressure on yields has increased year-to-date drawdowns for bond investors

Inflation is Steering the Ship

The stubbornness of inflation in the face of a hawkish Federal Reserve surprised many market participants during the quarter and added to fears of a looming recession. If the economy is the proverbial ship headed towards an iceberg, market-watchers fear that the Fed began turning the wheel too late to avoid a collision. Thinking back to last fall, the prevailing view was that inflation would be “transitory” as price pressures related to COVID-19 abated. The Fed was reluctant to raise interest rates a year ago due to uncertainty surrounding the pandemic. Data in Q3 2022 has done nothing to assuage fears that the Fed acted too late and has led the central bank to a path of aggressive rate hikes.

Year-over-year readings of the Consumer Price Index (CPI) showed prices increasing +8.30% through the end of August. Stripping out the volatile food and energy portions of the index still saw inflation increase +6.30%. With a stated target of 2.00% inflation over the long term the Fed has made it clear that their sole priority is to reduce price pressures by any means necessary. The bank has already embarked on one of the fastest hiking cycles on record by moving their benchmark rate from 0.25% to 3.00% since March of this year. Most forecasts show multiple more hikes of at least 0.50% moving into 2023.

An aggressive Federal Reserve and persistent inflation have increased the odds of a painful recession. Most measures of the US Treasury yield curve are in forms of inversion, meaning longer term rates sit below shorter-term rates. Inversion along certain points of the yield curve tends to be a reliable indicator of impending recession. One explanation is that bond investors are forecasting that the Fed will need to lower its policy rate in the future to combat a slowing economy. As of today, the Fed is still hoping to engineer a “soft landing” by taming inflation without a prolonged recession.

There are a few positive data points that could help remove some pressure from the Federal Reserve in the next few months. For one, the math of year-over-year inflation calculations shows that the headline CPI number should decrease soon. If month-over-month inflation is flat or even slightly positive (e.g., 0.10%) over the next several months, the headline CPI number that was just +8.30% will be back around +2.00% by Spring 2023. Some of the supply chain strains post-COVID have also shown signs of easing. Shipping costs and supplier delivery times are in sustained downtrends and elevated inventories should relieve some pressure on prices as companies sell excess product…

Continue reading by downloading the full report HERE which includes the following exhibits and sections:

  • Stocks Firmly in Bear Market
  • Little Cushion from Bonds
  • Housing Market Back in Focus
  • Inflation Remains Stubbornly High
  • Supply Chains Starting to Recover
  • With Inflation Running Hot, Fed Forced to Play Catch-up
  • Looking at Past Rate Cycles
  • Bonds Not Providing Typical Protection, But Yields Higher
  • Effect of Rising Rates on Bond Returns Depends on Horizon
  • How Much Will Rising Rates Bring Down Housing Prices?
  • Active Manager Headwinds Continue
  • Recession Fears Beginning to Impact Earnings Estimates
  • Where Do we Go From Here?
  • How to Invest During Bear Markets?
  • Foreign Equity Market Headwinds
  • Risks: Geopolitical Hot Spots