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Thoughts From Last Week
Although 4Q22 looks set to be another tough quarter for public markets, investors should not be overly pessimistic.
The third quarter of 2022 saw financial assets continue their year-to-date decline, as positive stock-bond correlations and a pullback in commodity prices delivered negative returns across all asset classes except cash. A third consecutive rate hike of 75bps from the Fed piled further pressure on bonds, with U.S. fixed income markets down 4.8% in 3Q22. Additionally, the combination of rising rates and growing concerns around a policy error leading to recession led global high yield to decline 2.7% in the third quarter. Although credit quality has remained relatively stable this year, slower growth, persistent inflation, and higher rates could increase credit risk over the next few months. Turning to equities, U.S. large cap and small cap equities found little relief in 3Q22, as a further deterioration in multiples and declining earnings expectations led to negative returns. In international markets, developed market equities fell 9.3% as European markets continue to be challenged by higher energy costs and a negative reaction to the U.K.’s recent fiscal and monetary policy. In emerging markets, equities were down 11.4% as rising inflation across geographies and questions about China weighed on returns.
Although 4Q22 looks set to be another tough quarter for public markets, investors should not be overly pessimistic. S&P 500 forward multiples are currently ~9% below their long-term average, while high quality fixed income valuations are currently sitting at 10-year lows. These attractive valuations, coupled with elevated interest rate and equity volatility, should be welcomed by investors, as a combination of the two has historically led to significant long-term investment opportunities.
Source: Bloomberg, FTSE Russell, FactSet, MSCI, NAREIT, Standard & Poor's, J.P. Morgan Asset Management.