In Review

Despite a strong rally in July, global equity and bond markets retreated further in the 3^rd quarter as markets priced in additional central bank tightening amidst a global growth slowdown. U.S. equities declined -4.9% in the 3^rd quarter, bringing year-to-date performance to -23.9%. The Bloomberg Global Aggregate Index fell an additional -6.9% in the 3^rd quarter, bringing the year-to-date return to -19.9%. International developed equities slid -26.8% year-to-date as the U.K. and the Eurozone deal with surging energy costs. The Fed and other central banks reiterated that inflation remains their primary focus, even if it comes at the expense of economic activity. The Fed is reacting to the official data and risks overtightening given the lagging nature of inflation data reporting. We continue to see easing core PCE inflation and significantly tighter financial conditions that should translate into lower headline inflation. Labor markets remain very tight but there are some early signs of easing that could result in slower wage growth and anchored inflation expectations. As it becomes clearer that inflation is declining, investor attention will likely shift more towards corporate profits. Nominal GDP growth has remained strong, resulting in solid top-line growth for U.S. companies. Earnings have been resilient this year, in fact the entirety of the S&P 500’s year-to-date performance has come from multiple contraction as earnings growth has remained a positive contributor. A clearer picture of the direction of both nominal GDP and central bank tightening would allow for greater certainty around corporate profits. Until then, elevated uncertainty will remain and will manifest in sustained volatility in both equity and rate markets.

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