A volatile year for financial markets extended into the third quarter, as investor confidence and patience were tested by swings in stock and bond prices. A period marked by a strong start for equities in July (up 15% in the month) transitioned to a poor September and negative return for the quarter. Troubling themes from earlier in the year continued to dampen investor sentiment, including the rise in interest rates, rampant inflation, and the Ukrainian conflict. Even the strongest companies faced challenges, as Apple Inc. warned of slowing sales for their products while FedEx Corporation issued a dour outlook for consumer demand with the holiday season fast approaching.
Knowing how well the stock market discounts future news, the S&P 500’s 24% drop in price year-to-date is a strong indication of what is in store for the global economy in the quarters ahead. Consequently, investors continue to weigh the impact of known geopolitical tensions and the associated implications for business sentiment. On the economic front, challenges from inflation are well known, and have drawn a coordinated response from Central Bankers around the world to tighten monetary policy through higher interest rates. In the U.S., the Federal Reserve is expected to raise the Federal Funds interest rate to 4.90% by March of 2023, in their effort to address inflation of 8.3% while slowing wage growth in a labor market plagued by a short supply of workers. Early indications are that higher interest rates are having their desired effect, as home sales have fallen in recent months while reports from the Institute for Supply Management reflect slowing manufacturing activity.
While there is plenty of worry to go around, and investor sentiment has turned decidedly negative, there are reasons for optimism as we look ahead to 2023 and beyond. Importantly, inflation should be on a downward trend in major economies in the months ahead, helped by easing supply chains and resolved trade bottlenecks. In addition, the Chinese economy has the potential to lift global business conditions as they roll back their COVID-19 lockdowns. As it relates to the current bear market in stocks, the recent fall in share prices is creating attractive valuations for new investments. Investors can also find solace in a stock investment’s ability to protect during inflationary times, as companies are astute at raising prices and protecting their profit margins. In the fixed income market, and thanks to higher interest rates, bond investors can now make new purchases of bonds paying fifteen-year highs in income yield. Finally, with the upcoming elections taking place in November investors should remember that stock markets have historically been strong following the mid-term voting (averaging a 16% annual return for shareholders), in turn giving us all reason for cautious optimism and hope.
