Quarterly Market Outlook and Review: Q3 2022

The third quarter of 2022 was a classic tale of two halves. We will proceed to cover this quarter’s many events but before doing so we start with an important message. Amidst the depths of this bear market, investors must look forward; at this point there is little to gain and potentially a lot to lose from making significant portfolio changes. History suggests that once you breach -20%, the trough is usually much closer than the beginning. As such, appropriate asset allocation, diversification and capturing the bounce that typically follows sharp downturns will be crucial to ensuring today’s bear market is just another period of volatility on your way to strong long run returns. After all, the S&P 500 has returned 10,200%, or 11.5% annualised, since 1980 despite many occurrences of double-digit intra-year pullbacks, as shown in chart 1.

After reaching a year to date low of 3666 on 16th June, the S&P 500 rallied 17.4% through mid-August amid better than feared corporate earnings and hopes of slowing inflation and rate hikes in the US. The summer rally sparked debate on whether markets had entered new bull market territory or if it was merely a bear market bounce. Bulls pointed to the S&P 500’s retracement of 50% of its losses and its surging breadth, with 92% of stocks trading back above their 50-day moving average, which historically have marked the start of new bull markets. Bears argued further downward earnings revisions would be needed and saw the S&P 500’s failure to break through its 200-day moving average as reasons to argue markets would hit new lows before a new bull market transpired. Unfortunately, the second half of the quarter saw markets resume their sell off and new bear market lows were reached at quarter end.

What was the turning point you might ask? The answer; the Federal Reserve’s annual Jackson Hole Economic Symposium. The equity market rally was accompanied by a sharp selloff in US bond yields with 10 Year Treasury yields peaking at 3.49% mid-June and retracing to 2.6% by early August. These moves had the undesired effect of unwinding the Fed’s tightening of financial conditions and markets started pricing in a hawkish tone from Fed Chair Jerome Powell’s keynote address at Jackson Hole.

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