A Quarter to Remember or Maybe Forget
Equity markets had a rough third quarter with the S&P 500 down 4.88%, the Dow Jones Industrial Average fell 6.7%, and the NASDAQ was off 4.11%. These results only extended the already rough 2022 investors have experienced.
In focusing on the S&P 500, it ended the quarter on a 52-week low and September’s decline of 9.34% was the worst monthly decline since COVID impacted the markets in March of 2020. From a sector perspective, Energy continues to lead the way for the year and was modestly positive on a total return basis for the quarter. Interestingly some of the weaker sectors for the quarter were high dividend paying areas like Real Estate and Communication Services. It might be that the relative safety of a 4.0% two-year treasury yield, rather than a 3% dividend yield found in some of these sectors, is attractive to investors.
Looking ahead, stocks surged to open the fourth quarter with the S&P 500 rising 5.7% on the first two days of the month. This is the largest two-day gain since April of 2020, but we do not believe this is the start of a big reversal in the markets. October brings the start of 3q earnings season and companies are likely to comment about the lingering effects of higher inflation and how the Fed’s actions this year are starting to put the brakes on the economy. Data is clearly showing the economy decelerating. The Conference Board Leading Economic Index (LEI) has declined for six consecutive months.
Stocks weren’t the only thing that rallied to start the quarter as bonds also saw some relief. Last week, the 10-year U.S. Treasury Bond traded at 4.01% (last seen in April 2010), as the 2-year U.S. Treasury Bond reached 4.36%. Today those rates are now 3.89% and 4.24% respectively.
One of our 7 views this year was that volatility would increase. We even defined that by saying the number of 1% daily moves in the market would be higher and maybe even double the level of 2021. Year-to-date, there have been 93 days where the S&P 500 moved at least 1% (43 up and 50 down), with 32 at least 2% (15 up and 17 down). For comparison, in 2021 there were 55 moves of at least 1% (34 up and 21 down). We expect this volatility to continue into the fourth quarter and likely continue through 2023.