As we kick off the last week of the third quarter, risk assets are very much on the back foot, with the S&P 500 off 22% year-to-date (and trading only 57 points above its low for 2022 of 3,636) and the yield on the US 10 Year Note at 3.69% (just 12 basis points off its multi-year high of 3.81% reached Friday). While inflation and an incredibly uns settled geopolitical construct continue to weigh on investor sentiment and investment returns, we think the primary drag on markets is the growing concern that an increasingly hawkish Federal Reserve will go too far, too fast in raising rates, pushing the economy past a possible “soft landing” and into a meaningful recession. It is a point of concern we share, and our colleagues Tom Wilson, CFA, and Brian Storey, CFA, do a first-rate job explaining the ongoing interplay between monetary policy and the markets here. For those who don’t have time to read their write-up, we want to call out three points they touch on that we think should be top of mind for investors as the fourth quarter gets underway:
1. Politics – markets tend to sell off into a mid-term election and rally once the votes are counted. Also, investors tend to welcome a divided Congress – a likely outcome post-election day – and 2023 will be the third year of the presidential cycle, which has historically been very favorable for markets.
2. Profits – corporate profits have held up remarkably well in 2022 and are expected to grow high single digits for the year. JP Morgan Chase kicks off Q3 earnings season on October 14th. If Q3 earnings don’t disappoint, it would be a meaningful positive for equities into year-end.
3. Peak (we think) inflation – despite a hotter-than-expected August CPI report, we think inflation has peaked and will be moving lower (commodity prices, including oil, are down sharply and even rent and wage growth are weakening). That should allow the Fed to ease up on the rate hiking front into year-end – we hope.
Finally, one thing that might matter most of all as it concerns the outlook for the economy is that the yield on the US 3 Month Treasury Bill remains below the yield on the US 10 Year Treasury Note (see chart). We haven’t entered a recession in the past 40 years without that part of the yield curve inverting.
The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital Investments, LLC, a registered investment advisor. 1765-BCI-9/26/2022