Market Insights: Third Quarter 2022

Stocks and Bonds Extend Their Declines 

Global markets declined again in the third quarter as inflation remained stubbornly high, the Federal Reserve continued to aggressively hike interest rates, fears of a global recession mounted, and geopolitical tensions escalated further. The S&P 500 fell 5% and is down 24% year-to-date. 

The second half of ‘22 started with optimism fueled by stronger-than-expected corporate earnings, signs of a potential peak in inflation, and growing hope that the Federal Reserve would soon ‘pivot’ to a less-aggressive policy stance. But throughout August and September, that optimism was quickly eroded by sticky inflation data and the Fed signaling there was no imminent end to the rate hiking cycle. Early gains in the quarter were quickly wiped out, ultimately proving the rally as nothing more than a ‘bear market rally.’ Providing another headwind and adding to global inflation pressures was the U.K. government announcing a stimulus package designed to help citizens and corporations offset increased energy costs in the upcoming winter months. This caused a dramatic increase in volatility and markets finished the quarter at the lows for the year.

As we start the final quarter of 2022, it’s obvious that the markets and the economy are facing enormous challenges.  But the reality is the market has declined substantially, presumably already pricing in a lot of ‘bad news.’ Valuations on many quality companies are quickly approaching pre-pandemic levels, while the S&P 500 more broadly is trading at a valuation that has, historically speaking, been attractive over the longer term.  Additionally, multiple sentiment indicators have hit or are approaching levels that represent extreme pessimism and negativity towards the market. They are largely ignoring the reality that positive surprises can and have occurred, even in difficult times such as this. If inflation suddenly decelerates quickly, the Fed signals a clear end to rate hikes, or if there is positive geopolitical news, the potential is there for a powerful rally in both stocks and bonds. Through periods of similar macroeconomic turmoil, markets eventually recouped the losses and moved to meaningful new highs. There is no reason to think this time will be any different. 

The Primoris Wealth Advisors Team