For investors, the third quarter started with a relief rally but ended back in the doldrums.

It was a big quarter for the already bleeding bond market, where many bond mutual funds are posting their worst losses ever.

The result is that even investors with diversified portfolios among stocks and bonds – through what is often called a 60/40 portfolio approach on Wall Street – are facing losses of nearly 20% this year . In fact, in the third quarter, a 60/40 portfolio would have outperformed a portfolio generally invested in stocks, which is highly unusual.

Stock and bond market performance—along with extreme movements in currency markets—continued to be driven by the aftereffects of years of high inflation, aggressive interest rate hikes by the Federal Reserve and other major central banks, and rising risks. the recession, and a long recovery from the pandemic and the Russian invasion of Ukraine.

By the end of the quarter, stocks were firmly in bear market territory, and bond yields—which move in the opposite direction of prices—were at their highest levels in recent years.

Exhibit 1

It didn’t start out that way, though. A stock market rally that began at the tail end of the second quarter took the Morningstar US Market Index up more than 18% from its mid-June low. Bond yields fell on expectations that inflation had passed its peak and that the Fed might cool its hawkish interest rate hikes.

But a very high inflation reading for August was a cause for concern for investors and Fed officials alike. At the latest policy meeting on September 20, chairman Jerome Powell and the Federal Reserve board signaled more rate hikes for the rest of the year, sending bonds and stocks into a selloff that lasted through the last days of the quarter.

Key Statistics: Q3 Market Performance

  • The Morningstar US Market Index lost 4.6% during the third quarter. Stocks hit a new bear market low on the final day of the quarter, down 24.9% so far in 2022. That’s their worst performance through this point in any year since 2002.
  • It was a dramatic round trip for stock market performance in the third quarter. The Morningstar US Market Index rose 14.6% from the end of June through August 16, then fell 16.5% from that high by the end of the third quarter.
  • The Morningstar US Market Index has fallen for three quarters in a row, the kind of losses not seen since 2008.
  • Dividend stocks took a hit, falling 5.6% as a group, trailing the broader market by a full percentage point.
  • Bonds are having their worst year in modern history, as the Morningstar US Core Bond Index fell 14.6% for the year through September 30.
  • The yield on US Treasuries hit a two-year high, ending the quarter at 4.22%, up from just 0.27% a year ago. Before September, two-year yields were not as high since October 2007.
  • The yield curve has now inverted significantly, showing a commonly cited indicator of an impending recession. The last time the yield curve inverted at all was in 2019. Now, it’s the most inverted since the summer of 2000.
  • The Fed’s hawkish effort to stamp out inflation led to two more aggressive rate hikes, raising the target effective federal funds rate to 3.00%-3.25%, the highest level since 2008.
  • The US dollar is on its strongest run in two decades, adding to concerns about the outlook for corporate earnings.
  • Crude oil prices reached their lowest levels since January, ending the quarter at $77.1/barrel.

Exhibit 2

Best and Worst Market Performance

By the end of the third quarter, economically sensitive markets were among those with the biggest losses as investors remained concerned about the possibility of a global recession amid sharply rising interest rates.

The Morningstar US REIT Index – which represents publicly traded real estate investment trusts – and the Morningstar 10+ Year Treasury Bond Index, both sensitive to changes in interest rates, fell 10% this quarter.

The Morningstar UK Core Bond Index had its worst quarter ever as the British pound fell to a record low against the dollar. The value of the pound fell sharply after the new UK government unveiled plans to grow the country’s economy through a combination of tax cuts and heavy government borrowing at a time when inflation is already a challenge.

Although the third quarter saw a poor performance for investments in emerging markets overall, some countries bucked the trend. Among Morningstar’s country indices, the Morningstar Turkey Index was the best performer as the country’s central bank continued to lower interest rates despite 80% inflation. Positive gains were seen in the quarter below in the Morningstar indices of Brazil and India.

Exhibit 3

Stock Market Performance

At the end of the third quarter, stocks were back in bear market territory, erasing a bounce that began in the final weeks of the second quarter.

Although the third quarter ended on a sharp note, the stock market’s performance had started on an up note. In July, the Morningstar US Market Index jumped 9.4% for its best monthly performance since November 2020. Stocks continued to run through the first half of August, hitting a high on August 16. That rally had stocks up 14.5% for the quarter. , clawing back more than half of the market’s losses through mid-June. The strong move higher, along with expectations that inflation had peaked, left investors wondering if the worst was over and if stocks had begun a new bull run.

But it was not to be.

Inflation continued to run hot, and by September, a third consecutive aggressive interest rate hike from the Fed and growing fears of a stock market recession triggered another fall. An earnings warning from global shipping company FedEx FDX added to concerns about the impact of a slowing global economy on corporate profits, which remained stronger than many expected.

The Morningstar US Market Index hit a new bear market low on the final day of the quarter on September 30 as investors shrugged off continued volatility and the potential for an extended bear market, rather than the V-shaped bounces that occurred in after that. recent downturn.

By the end of the third quarter, stocks were down 4.6% for the previous three months and 24.9% so far in 2022.

Exhibit 3

Value Stock vs. Growth Stock Performance

It’s been a brutal year for investors in growth stocks, but at least the third quarter didn’t see those losses get much worse.

For much of the quarter, there was no clear winner in the value growth tug-of-war: Some of the markets recommended going to beta instead—measures of volatility—to find the next leaders among the uncertain prospect. But in the final days of the third quarter, growth and compounding stocks outperformed their value peers.

In fact, by the end of the third quarter, losses on value stocks were higher than those on growth stocks, a change from the previous quarter, when value outperformed growth by the widest margin since the collapse of the bubble. – com.

Still, major growth stocks are having their worst year since 2008.

Exhibit 5

The Strengthening Dollar

The Fed’s rate hikes have also caused significant ripples in the currency markets, where the US dollar has risen to multi-decade highs against major currencies.

The dollar is having its best run in 20 years. With US interest rates rising rapidly and investors worried about a global economic slowdown, investors have moved into the US currency in search of yield and safe havens. The dollar rose 8.6% during the quarter. Meanwhile the euro fell 6.8% against the dollar, while the yen fell 15.2%.

A strengthening US dollar is likely to have a negative impact on third-quarter earnings, according to Morningstar chief markets strategist David Sekera. In particular, large multinational technology companies will see growth as a significant chunk of their sales will come from outside the United States. That’s because as the value of the dollar rises, it makes goods produced in the US more expensive outside the country.

Exhibit 7


Major commodities fell during the third quarter, with the notable exception of wheat prices, which rose 10.9% for the period, as Russia’s aggression in Ukraine continues to affect the world’s wheat supply.

Despite gold’s long history as a safe haven, as Morningstar portfolio strategist Amy Arnott writes, its ability to improve portfolio performance over longer periods remains elusive. This quarter, the asset class sputtered and fell into negative territory with losses of 8.2%.

Copper also finished the third quarter in the red, although its decline was muted compared to the sharp second quarter drop of 21%. The metal is seen as a bellwether for the global economy, as it is used as an input in production and equipment for a wide range of industries.

line graph of third quarter commodity futures performance.


Investors in cryptocurrencies also continued to suffer through volatility. However, in the case of bitcoin – the first cryptocurrency and the largest by market size – swings were much more muted than they were, especially compared to the second quarter when it lost 57% of its value .

Bitcoin began trading July 1 at $19,820 and closed on September 30 at $19,431.

The second-largest cryptocurrency, ether, ended the quarter in positive territory but well off from the best levels of the previous three months.

cryptocurrency performance line graph.

What’s Next for Stock and Bond Market Performance?

From here, the outlook will depend almost entirely on the speed at which inflation begins to decline, according to market strategists and fund managers.

Unless inflation eases quickly, the pressure on stock and bond markets is unlikely to ease anytime soon. Currently, there are more signs pointing to a slowdown in economic growth and the Fed is preparing for two more interest rate hikes before the end of 2022.

Against this backdrop, investors need to keep their seat belts up and be prepared for more volatility and even tougher market performance in the coming months.

Note: This article was originally published for a US audience

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