Market’s rollercoaster ends Q3 with a sharp decline amid central banks commitment to higher rates for longer
Global financial markets extended their losses in the third quarter. A combination of central banks around the world hiking rates, persistent inflation, currency, and bond market volatility, and rising geopolitical concerns produced a massive selloff across all markets.
The quarter started off with a rally fueled by signs of inflation peaking, and expectations that the U.S. Federal Reserve (the Fed) could soon end its rate-hiking cycle, and pivot to lowering rates due to slowing growth. U.S. Inflation figures dropped to 8.3% in July, down from the 9.1% in June. Investors viewed the signs as encouraging and, as a result, markets rallied. Then came the Jackson Hole Symposium in late-August, where U.S. Fed chairman Jerome Powell’s commented that rates are going to stay higher for longer, even if it may cause pain to businesses and households. Markets got spooked and the selloff frenzy ensued throughout the rest of the quarter, wiping out all previous gains from July. U.S. August inflation data came in at 8.3%. Although headline inflation was lower, core inflation was significantly higher. A higher core inflation, which discounts the volatile contribution from food and energy prices, is concerning for the Fed and markets participants alike, thus exacerbating the selloff.
As central banks across the world reiterated their stance of aggressively hiking interest rates in response to persistent high inflation, risks of a global recession became elevated, particularly in the Eurozone. The U.S., UK, and Canada also saw their probability of a recession increase.
Equity markets were down sharply.
- The S&P 500 ended the quarter down 4.9% and down 24% year-to-date (YTD)
- The Dow Jones Industrial Average ended the quarter -6.2% and -20% YTD
- The Nasdaq 100 ended the quarter -4.4%, and -32.3% YTD
- The S&P TSX Composite ended the quarter -2.2 and -13.1% YTD
- Internationally, the MSCI EAFE ended the quarter -9.3% and -26.7% YTD
Chart 1: Major markets take a hit in Q3
Total return, indexed to 0 as of January 1, 2022