2022 Q3 Commentary

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Entering the 3rd Quarter, the markets were oversold. Solid company earnings and the hope that inflation/interest rates were peaking, led to a strong rebound in the markets during July and early August. However, “sticky” inflation data and aggressive statements by Federal Reserve led to a reversal and the “bear” market reasserted itself as fears of higher rates and slowing growth overwhelmed the positive bias developed earlier.

During the quarter, the Federal Reserve’s raise-and-hold / higher-for-longer messaging dominated the narrative and markets. For the 3rd Quarter, equity and fixed income returns finished in negative territory with year-to-date returns ending near 52-week lows. The S&P 500 Index, Dow Jones Industrial Average, and Nasdaq Composite delivered their worst performance for the first nine-months of a calendar year since 2002.1 Shares of the iShares Core U.S. Aggregate Bond exchange-traded fund (tracking investment-grade bonds) lost over 5% during the quarter and approximately 15% for the year – their worst performance going back to 2004.2

In the 3rd Quarter, equity sectors outperforming were Consumer Discretionary (+4.13%), Energy (+1.16%), and Financials (-3.62%) while Communication Services (-12.91%), and REITs (-11.75%), and Materials (-7.64%) lagged.4 In a reversal this quarter, the Russell 1000 Growth Index outperformed the Russell 1000 Value Index by 227 basis points but continues to trail by 12.75% on a year-to-date basis. The three best-performing stocks in the S&P500 Index were Constellation Energy Corp. (+45.5%), Enphase Energy, Inc. (+42.1%), and Etsy, Inc. (+36.8%) while the three worst-performers were Charter Communications, Inc. (-35.3%), FedEx Corp. (-34.2%), and Catalent Inc. (-32.6).5 The Federal Reserve raised the Fed Funds rate 0.75% at its September meeting ( the third consecutive 75 basis point hike ) – bringing the target range to 3.00% to 3.25%. Market forecasts are predicting the Fed Funds rate rising to 4.25% to 4.50% by year-end, implying another 1.25% in rate hikes. During the quarter, Treasuries came under pressure with the yield curve reaching the most inverted level this century - remember that an inverted yield curve is a historical precursor to recessions. Two-year yields were up 130 basis points to just over 4.20% while ten-year yields rose eighty-five basis points to just over 3.80%.6

A resilient economy, strong labor market, and “stickier” inflation components led to a higher, more aggressive Federal Reserve that caused tightened financial conditions, raised volatility, and lowered security prices in both equities and fixed income. Year-to-date, the dual drawdowns in equities and bonds offered investors few places to hide. Balanced investment portfolios were battered with your typical 60% equity / 40% fixed allocation on track for its second-worst return in 25 years, exceeded only by 2008.7

With the Federal Reserve signaling its commitment to bring inflation under control, economist and investors have grown fearful that their aggressive rate hike cycle will meaningfully slow the economy, and reduce profits leading to a recession. The U.S. economy has contracted for two consecutive quarters – the simple definition of a recession. However, the National Bureau of Economic Research formally “calls” recessions based upon a broader definition including employment, wages, and job growth. With these inputs still strong, a formal recession announcement is a more difficult fact. While profit growth has been slowing this year, earnings continue to trend higher. For 2023, Wall Street’s 8% earnings growth expectation is still above average. This compares to a historical negative (-10% to -30%) earnings growth rate that occurs during a recession.8

Given slowing growth, increasing interest rates, inflation, and average valuation levels; Fundamentum strongly believes future, long-term investment returns will be below historical norms. Therefore, we continue to encourage Advisors to build diversified portfolios with lower capital market returns into their client’s long-term financial plans and expectations.


As always, we appreciate your confidence in our team.

Fundamentum Investment Committee

John Nichol, CFA® - Chief Investment Officer
Trevor Forbes - Investment Committee
Robert Armagno - Investment Committee

References:

  1. Dow Jones – Inflation Date, September 30, 2022.
  2. Dow Jones – Third Quarter, September 30, 2022.
  3. Bloomberg Business News, September 30, 2022.
  4. FactSet Street Account, September 30, 2022.
  5. Strategas - Quarterly Review in Charts, October 3, 2022.
  6. FactSet Street Account, September 30, 2022.
  7. Wilshire Market Navigation, September 2022.
  8. FactSet Research - Earnings Insight, September 30, 2022.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

The Russell 1000 Index consists of the 1,000 largest securities in the Russell 3000 Index, which represents approximately 90% of the total market capitalization of the Russell 3000 Index. It is a large-cap, market-oriented index and is highly correlated with the S&P 500 Index.

The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following developed country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK.

The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCI EM Index consists of the following emerging market country indices: Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece, Hungary, Poland, Qatar, Russia, South Africa.Turkey, United Arab Emirates, China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand.

The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.

The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.

The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.

The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.