The challenging market environment continued in Q3. Central banks, most notably the U.S. Federal Reserve Bank (the “Fed”) have been firm in their stance that inflation is enemy number one. In attacking inflation, the Fed has aggressively increased interest rates beyond most of our expectations which, as would be expected, has pummeled long-term fixed-income assets and risk assets generally (e.g., stocks).

The Federal Reserve Bank (the “Fed”) governors just concluded their annual trip to Jackson Hole. The trip was punctuated by a rather “hawkish” press conference by Chairman Jerome Powell where he emphasized a concern over inflation and the group’s commitment to focusing on it until “the job is done.”

As we’ve covered in recent blog posts, the past decade was one of unprecedented stimulus. The Federal Reserve Bank of the United States (the “Fed”), and other central banks, were arguably over-accommodative, through interest rate policy and an unprecedented increase in M2 money supply.

It would be an understatement to say that it’s been a tough first half of the year. As measured by the S&P 500 Index, the U.S. stock market (down 20.6% year-to-date) is off to its worst start since 1970. Similarly, the bond market, as measured by the Bloomberg U.S. Aggregate Index (down 10.4% year to-date) is on track for its worst year since 1973.

2022 is off to a very rough start for the bond market. Through May 5th, the Bloomberg Global-Aggregate Total Return Index, which represents a diversified pool of global bonds, is down over 12% - a loss of over $6 trillion in value. Certain sectors of the bond market have fared much worse (e.g., the long-term US Treasury bond ETF (“TLT”) is down over 23%).

In our end-of-year update, we warned of a likely pull-back in 2022, and it certainly arrived. US and global equity indices fell considerably with the technology sector faring the worst as expectations for interest-rate increases intensified. Nasdaq indices even reached “bear market” territory (i.e., a decline of 20%+) before surging to close the quarter.