Global Asset Allocation Team Market Update – September 2022
Volatility resurfaced in August and the summer rally fizzled out after a chorus of Federal Reserve officials closed the door to a near-term dovish pivot and dashed hopes for a soft landing. Notably, officials signaled that the central bank is likely to keep raising interest rates and keep them elevated for some time to curb stubbornly elevated inflation. Policymakers also pushed back on the notion that the Fed would soon reverse course and cut rates in 2023, while also warning that restoring inflation to the 2% target will result in economic hardship for both households and businesses. Both stock and bond markets generated negative results in August, underscoring the case for private markets strategies in a well-balanced portfolio.
Global equity markets resumed their downward trend in August as investors contemplated the Federal Reserve’s resolve in combatting inflation, even if its at the expense of growth. The MSCI All Country World slipped 3.9%. Growth stocks assumed the brunt of the pain as soaring bond yields weighed on the most expensive corners of the market, namely technology. The S&P 500 erased half of its early summer rally and sank 4.2% in August. The S&P/TSX declined by a more modest 1.8%, while the MSCI EAFE shed 5% and the MSCI Emerging Markets index ended the month unchanged.
Fixed income markets also generated negative results as central banks around the globe stepped-up their efforts to quell inflation. Bond yields jumped higher following Chair Powell’s highly-anticipated appearance at Jackson Hole, where he reiterated that monetary policy will need to move “forcefully” and “purposefully” to bring inflation back to the 2% goal. The Fed chief said the central bank is likely to keep raising interest rates and leave them elevated, signalled another “unusually large” rate hike in September, and pushed back against premature rate cuts. The yield curve bear-flattened in response. Powell’s hawkish-leaning remarks saw the two-year treasury yield rise by 61 basis points to 3.49% in August, while the 10 year treasury yield rose by 54 basis points to 3.19%. Longer-term bond yields remain lower than the two-year treasury yield as markets widely expect an economic slowdown in response to tighter policy. The FTSE Canada Bond Universe lost -2.7% in August, while the Barclays U.S. Aggregate was down -2.8%.
In currency markets, the U.S. dollar extended its unrelenting advance and hit a 20-year high after Chair Powell underscored the Federal Reserve’s unwavering commitment to rein in inflation. This hawkish message was followed by similar rhetoric from a flurry of other Fed officials who reinforced the need to raise interest rates into restrictive terrain and hold them there for some time. The U.S. dollar strengthened against all of its major peers in August.
Finally in commodity markets, crude oil declined for a third straight month amid mounting fears that tighter monetary policy will curb growth and energy demand. Gold posted its fifth straight monthly drop as a soaring dollar and the back-up in treasury yields dampened the appeal of the non-interest bearing metal. Copper retreated as concerns about global growth gripped markets, with Europe’s energy crisis, tighter monetary policy, and China’s Covid Zero strategy crimping demand prospects for industrial metals.