The 3rd quarter of 2022 was a tale of two-eighths. Beginning two weeks into an 8-week-long rally in which the S&P 500 index gained 17.4%, the quarter’s mid-way point marked a startling reversal. The next 45 days saw the market give back all the prior 8-week’s gain and them some, closing 2.21% lower on September 30th versus the prior low of June 16th.
Beyond the sheer ferocity of the reversal, its technical ramifications may be issuing an ominous signal for investors to heed over the next couple of quarters. At its closing value on August 16th, the S&P 500 had regained roughly 56% of its peak-to-trough decline between its record closing on 1/3/2022 and 6/16/2022. Never before had such a 50% retracement failed to mark the beginning of a new bull market – until it broke through the June 16th low on September 26th.
Professional chart watchers observe that whenever long-established patterns are broken, the current trend (in the present case, downward) is not only confirmed but strengthened. This technical breakdown is accompanied by fundamental pressures including a number of high-profile earnings misses that have Wall Street analysts scrambling to revise their profit forecasts for corporate America over the coming quarters, as ongoing supply chain disruptions and inflation that has changed consumers’ buying habits wreak havoc on business operations.
Equity investors must come to grips with the notion that stocks may not yet be cheap even with the S&P 500 index losing more than 25% of its value in nine months. The market’s overall price/earnings (P/E) ratio is still well above historical bear market bottom levels. And with the bear market in bonds pushing yields on fixed income investments back toward historically more normal levels, bonds can be expected to compete with stocks for investors’ capital for the first time in roughly a decade going forward.
2022 has not been kind to bond investors either. No sector has been spared, but investment grade corporate bonds have actually taken a worse beating than their junk bond counterparts. This could change as the economy worsens, but until the Fed stops hiking interest rates we should expect more distress on bond values as well as a breakdown in the housing market as 30-year mortgage rates eclipsed 7% for the first time since 2007 as the quarter ended.
Third quarter and year-to-date 2022 performance for the major market indices follows:
- S&P 500: - 4.88% - 23.87%
- Dow Jones Industrial Average: - 6.17% - 19.72%
- NASDAQ Composite: - 3.91% - 32.00%
- Russell 2000: - 2.19% - 25.10%
- MSCI EAFE: - 10.01% - 28.88%
- MSCI Emerging Markets: - 12.48% - 28.91%
- Bloomberg US Aggregate Bond: - 4.75% - 14.61%
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Market data provided by JPMorgan Asset Management and MarketWatch.com.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following developed
country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK.
The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCI EM Index consists of the following emerging market country indices: Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece, Hungary, Poland, Qatar, Russia, South Africa, Turkey, United Arab Emirates, China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.