Update for Q3 2022
Heading into the last part of the year, there are always opportunities in any market environment. Higher interest rates for savers who look in the right places is a bright side to the current environment, plus the largest increase to Social Security payments in decades.
The third quarter started with optimism surrounding a resilient corporate earnings outlook, a potential peak in inflation, and a closer-than-expected end to the current Federal Reserve rate-hiking cycle. But throughout August and September that optimism was eroded by sticky inflation data and a more hawkish-than-expected Fed. As we start the fourth quarter, markets remain in search of concrete signals of declining inflation and a less-aggressive Federal Reserve.
A resilient performance by corporate America this quarter showed investors that, despite numerous macroeconomic challenges, U.S. earnings were holding up better than expected. The Consumer Price Index (CPI) report in September showed a slight increase in prices, suggesting inflation was not rapidly declining towards the Fed’s target and interest rates will likely stay high for the foreseeable future.
Interest rates: Rates are one of the key market drivers this year. The Federal Reserve hiked interest rates by 75 basis points twice this quarter. Fed Chair Powell reiterated the plan for further rate hikes and prepared the country for some short-term economic pain as a result. Higher rates are intended to cool market growth and inflation, so the Fed believes some short-term market declines are worth the investment in longer-term economic health.
International: International stock markets have had roughly equal losses as the S&P 500 this year, as inflation and the Russia-Ukraine conflict affect many countries. United Kingdom Prime Minister Truss announced new spending and tax cuts in September, causing world markets to decline on the expectation that these policies would worsen inflation in a G7 country. In a surprise move, Truss walked back the announcement and markets bounced up. Russia escalated the war in Ukraine by holding referendums in occupied Ukrainian territory and announced a draft (“mobilization”) from the general Russian population.
Market Outlook for Q4 2022
The twin effects of fiscal stimulus and post-pandemic reopening that were powering momentum prior to this year have faded and been replaced by drags on economic activity: lower government spending (good for the deficit, bad for household spending power), higher mortgage rates, and lower exports impeded by the strong dollar. Profits are growing much more slowly than in recent years. Elevated inflation and tighter financial conditions have become a global phenomenon.
[Source: Fidelity Quarterly Market Update Q4 2022]
The labor market remains a bright spot for the economy. There are currently nearly two job openings for every unemployed worker, empowering workers to seek better wages and conditions at new jobs and suppressing layoffs.