Like the last two quarters, markets struggled in Q3 due to rising rates, inflationary fears, and geopolitical turmoil from the Russia/Ukraine war. Mid-June to mid-August saw the markets rally on hopes of a less-hawkish Fed engineering a soft economic landing to quell inflation, but the Fed chairman put an end to that thought with his new tough talk as an “inflation fighter”.
Other global considerations such as persistent covid outbreaks in China, energy dependency and shortfalls in the Eurozone, and continuing supply chain disruptions also played out on the global scene impacting global markets.
The “Sea of Red” (Part 2!) persisted during Q3. As seen from the table below, all major asset classes generated negative total returns during Q3 and on a year-to-date basis. The most telling observation from the table is the weakness of bond returns in comparison to stocks. While the S&P 500 (IVV) was down -4.91% during Q3, core bonds (SCHZ) were down just about the same at -4.76%; investment grade corporates (LQD) were down even more at -6.15% due to a widening credit spread amidst fears of a weakening economy. The only “respite” was from short term investment grade corporate bonds (SLQD) with a -1.71% return mostly due to its shorter duration compared to LQD. Cash, of course, produced a 0% return during Q3 but offered no potential as a diversifier.
D&A did NOT “do nothing” in the face of the seismic shift in the markets. All client accounts traded a weighting of long bonds for short bonds and built up cash; actions that were positive contributors to return during Q3. But, like the market, all accounts are negative on the year.
Just like last quarter, my blog posts during Q3 had a decidedly negative bias with positive overtones. Yes, it is upsetting to see negative returns eat away at your investments, but as long as the investment strategy is consistent with your risk profile, time horizon and investment goals it is better to sit tight since history shows that long term investors are rewarded for their patience.