Stocks and bonds climbed in the first half of the quarter as concerns about inflation abated, but the Federal Reserve brought investors back to reality with aggressive interest rate policy and messaging.
After an initial rally, U.S. stocks ended the quarter near 2022 lows. Small-cap stocks fared a little better than their large-cap counterparts; growth stocks outperformed value stocks for the quarter.
Outside the U.S., stocks continued to face the perfect storm of economic, geopolitical, and currency headwinds. Inflation has reached double-digit levels across much of Europe as energy disruptions driven by the war in Ukraine put central bankers in difficult positions.
For bonds, a historically bad calendar year continued into the third quarter. Rising interest rates and concerns of an emerging recession have added to 2022 difficulties for public real estate.
“Supply chain constraints and rising gas prices have been key drivers of inflation. … Global logistics are showing signs of recovery.” — Andy Crake, Vice President of Loans and Investments
This is a historic year of poor performance of stocks and bonds going back to 1976.
What does this mean for investors? It’s not all bad news. There are signs of improvement that suggest the best thing to do is sit tight.
Since the end of the quarter – the markets have responded positively to earnings results, more moderate messaging from the Federal Reserve and the passing of mid-term elections. While the market may not recover fully before the end of the year — the direction of movement is much more positive. There are several tailwind supports occurring.
Input costs are improving
Supply chain constraints and rising gas prices have been key drivers of inflation. As companies right-size their inventories and transportation bottlenecks ease, global logistics are showing signs of recovery.
Additionally, gas prices are falling as additional supply, tax holidays and anticipation of an economic slowdown contribute to falling crude oil prices, a primary driver of prices at the pump.
The labor market remains strong
The U.S. labor market remains resilient despite the Federal Reserve’s efforts to cool the economy.
With 10.3 million current job openings in the U.S. (US BLS data), this is a two-decade high and nearly double the number of unemployed workers (US BLS data).
The Federal Reserve has been able to pump the economic brakes without an increase in unemployment or a decrease in wages — a Goldilocks outcome so far.
Expectations are low, potential is high
Investors remain bearish as widespread pessimism is weighing on investor sentiment across global markets. However, periods of extreme pessimism can provide attractive entry points as low expectations set the stage for positive surprises and recovery.
Reassurance in the long-haul
No matter what the market does next quarter or next year, we remind our investors to think long-term. Short-term dips matter less when markets are understood to appreciate over long periods of time.
Thank you for trusting the Foundation with your investments.
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Craske is the foundation’s vice president of loans and investments.