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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.
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.
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%).
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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.