Despite posting strong returns over the summer, global equity markets began to lose steam by the latter half of September. Persistent inflation, debt-riddled Chinese real estate companies, rising interest rates, prospective tax increases, and the startling prospect of a first-ever U.S. debt default all weighed heavily on financial markets. When Fed Chairman Jerome Powell suggested on September 22 that U.S. inflation may be more persistent than originally thought, interest rates rose sharply to reflect new market expectations for higher, more persistent inflation; the 10-year U.S. Treasury yield jumped from 1.31% to 1.47% almost overnight and finished the quarter at 1.52%. The impact was not isolated to bond markets; global equity markets declined in response, while U.S. growth stocks hit hardest.
U.S. Equity Markets Managed Gains
Despite a seemingly unending cascade of negative headlines, U.S. equity markets nevertheless largely managed to eke out gains for the quarter. The S&P 500, despite falling 4.7% for the month of September, still managed to return 0.58% for the quarter. Large cap stocks regained the mantle of leadership during the quarter, with the Russell 1000 returning +0.21% versus -4.36% for the Russell 2000 Index. Growth stocks outperformed value during the quarter with the Russell 1000 Growth returning 1.16% versus -0.78% for the Russell 1000 Value.
Outside the United States, the MSCI EAFE Index returned -0.45% and the MSCI Emerging Markets Index returned -8.09% for the quarter. Bond markets also suffered from the recent spike in interest rates, with the Barclays U.S. Aggregate and Barclays Global Aggregate Indexes giving up most of their previous gains, returning +0.05% and -0.88%, respectively, through September 30.
There’s Still Good News for Investors
With all the negative headlines these days, one is left wondering if there’s any good news for investors. And indeed, there is. For starters, valuations have been slowly declining (lower is better). The S&P 500, for example, began the year trading at 22.3x earnings. By September 30, it had come down to 20.3x earnings through a combination of strong earnings growth and a mild contraction in multiples. Yet despite declining valuations the S&P 500 still delivered a year-to-date return of +15.92%. And valuations are even more attractive for value and non-U.S. stocks. For example, the Russell 1000 Value Index and MSCI EAFE Index (an index of non-U.S. stocks) finished the quarter at 16x and 15.1x earnings, respectively. Emerging Market stocks remain attractively valued at 12.6x earnings.
Finally, earnings growth remains strong. While earning growth has moderated significantly (this year’s earlier high growth rates were fueled mostly by the reopening of the economy), analysts continue to forecast strong earnings growth for S&P 500 companies for fourth quarter (+21.5%) and for calendar year 2022 (+9.6%).
Three Take-Aways for Investors
- First, the news obviously changes. When the Fed earlier this year argued inflation would likely be temporary, our view was—and remains—that investors should take such claims with a healthy dose of skepticism. The economy is large and complex, making it painstakingly difficult to make strong claims about anything, let alone inflation. And the same is certainly true for global financial markets.
- Second, investing is a journey. Markets will be volatile from time to time. The news is often negative, distracting, and, of course, occasionally misleading, and often open to misinterpretation. When it comes to building wealth over time, we should always take the long view. Despite a global pandemic, a difficult political season, and a host of other challenges, the MSCI All-Country World Index, a highly diversified index of global stocks, is up 89.5% from its March 23 low.
- Finally, investors should work with their advisors to proactively de-risk their balance sheets. Diversifying across and within asset classes; systematic rebalancing; unwinding concentrated equity positions; updating our financial plans; keeping expectations realistic; and smartly harvesting capital gains and losses when and where appropriate are all ways to strategically manage risk across our balance sheets.
All of us at Mercer Advisors thank you for your trust and confidence. We remain fully committed to partnering with you and your family on your journey to economic freedom. As always, please feel free to contact your advisor with any questions.
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All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation may come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. This document may contain forward looking statements including statements regarding our intent, belief or current expectations with respect to market conditions. Readers are cautioned not to place undue reliance on these forward-looking statements. While due care has been used in the preparation of forecast information, actual results may vary in a materially positive or negative manner. This material has been provided for general information only and does not constitute personalized investment advice. All investments involve risk, including the possible loss of principal. Past performance is not a guarantee of future results. Diversification does not ensure a profit or guarantee against loss. Foreign investing involves special risks due to factors such as increased volatility, currency fluctuation and political uncertainties. Investments cannot be made in an index.