In this Q3 recap: Stocks closed lower in the third quarter as an early summer rally ended after the Fed pledged to continue its fight against inflation.
Quarterly Economic Update
A review of Q3 2022, Presented by Wendy Nelson
U.S. Markets
Stocks took investors on a roller coaster ride in the third quarter, with an early summer rally coming to an abrupt end after the Fed pledged to continue fighting inflation.
The Dow Jones Industrial Average dropped 6.65 percent during the quarter. The Standard & Poor’s (S&P) 500 Index fell 5.28 percent, while the Nasdaq Composite lost 4.11 percent. 1
A July Rally
After a painful slide from the start of the new year, stocks staged a powerful rally off their mid-June lows.
The summer rally peaked in July as both the S&P 500 Index and the Nasdaq Composite posted strong gains.
The fears of economic weakening that plagued the stock market all year seemed to lessen, even though much of the economic data suggested little had changed.
For example, June inflation came in at 9.1 percent, and many investors anticipated a 100 basis point hike in the federal funds rate after July’s Federal Open Market Committee (FOMC) meeting. 2
Powell’s August Speech
The upward momentum continued into the first half of August but ended abruptly as rate hike concerns reasserted themselves.
However, Fed Chair Jerome Powell’s hawkish speech at the Jackson Hole Economic Symposium sent stocks lower, returning the market to this year’s general malaise.
Economic Focus in September
Stocks saw a brief September upturn but lost momentum ahead of the September 20–21 FOMC meeting, in which the Fed announced its third consecutive 75-basis point hike of the year. 3
Even though markets anticipated the change in interest rates, the Fed’s dim outlook surprised many investors, forcing them to confront the potentially unavoidable scenario of an economic hard landing.
Quarterly Sector Scorecard
Many sectors were lower in the third quarter, but Energy (+0.71 percent) bucked the trend. Elsewhere, Communications Services lost 11.76 percent, Consumer Discretionary fell 3.62 percent, and Consumer Staples dropped 7.55 percent.
Meanwhile, Financials dipped 3.47 percent, Health Care slipped 5.56 percent, Industrials declined 5.15 percent, Materials fell 7.60 percent, Real Estate lost 11.87 percent, Technology slipped 6.73 percent, and Utilities dropped 6.59 percent. 4
What Investors May Be Talking About in October
In mid-October, China’s Communist Party will hold its five-year planning meeting, during which President Xi will most likely be elected to a third term and possibly “president for life.” This meeting will also craft China’s five-year economic framework and foreign policy. 5
The most immediate concern is whether China will maintain its zero-COVID policy, a decision that has slowed economic growth, affected global supply chains, and disaffected its citizens.
Observers will be watching China for any policy statements concerning Taiwan. Even the hint of military action may add further geopolitical risk to the financial markets.
China is an essential cog in the global supply chain and an important market for Western goods. The degree to which it pursues cooperation or confrontation will hold implications for global economies in the years ahead.
World Markets
Headwinds to global economic growth continued to build in the third quarter. The International Monetary Fund (IMF) now projects that global economic growth will decelerate to 3.2 percent in 2022 from its earlier estimate of 3.6 percent. 6
China’s zero-COVID policy has continued to slow its economy and strain global supply chains, causing the IMF to lower its estimate of China’s 2022 economic growth to 3.3 percent, the lowest rate in four decades, excluding the COVID pandemic period of 2020. 7
Economic conditions in Europe are also a concern as Eurozone economies remain depressed by accelerating inflation, strained supply chains, the war in Ukraine, and economic slowdowns in China and the U.S.— its largest trading partners. 8
Japan’s economy is facing challenges as well, though less acute than in Western economies. The Bank of Japan revised its economic growth projections to be lower due to weakened global economies and continued supply chain constraints. 9