Markets Brief: As Q3 Winds Down, the Stock Market Bounce Is History

With just days to go in the third quarter, what looked like a turnaround quarter for markets has turned for the worse for investors.

At one point in August, the Morningstar US Market Index had recovered more than 18% from its mid-June lows, and bond yields began falling on hopes that inflation was peaking and the Federal Reserve’s aggressive rate hikes could cool down.

But when it became clear that inflation was far more persistent than most investors — and Fed officialshad expected, soured the mood. As Fed officials signaled last week, there are many more rate hikes ahead in the coming months.

This week may not bring much change to the short-term outlook as there is relatively little major economic and corporate news on the calendar. A key report, however, will come on Friday with the release of August data for the Fed’s preferred indicator of inflation, the Personal Consumption Expenditure Index.

In July, the PCE inflation index posted a 12-month gain of 6.3% from 6.8% in June. Economists expect the PCE index to rise 6.1% year-on-year in August, according to FactSet. A bad reading could further entrench negative sentiment in both bond and equity markets.

Even with third-quarter results not being released for a couple of weeks, investors also need to be wary of companies releasing preliminary earnings numbersalso known as advance noticeslike FedEx’s recent warning of a slowdown in business thanks to economic headwinds.

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For investors who haven’t reviewed their portfolios recently, the third quarter itself doesn’t look too bad when measured from start to finish. As of Friday’s close, the Morningstar US Market Index is down 2% for the quarter.

But that obscures the round trip the market has taken over the past three months. By mid-August, shares were up 18.4% from their June bear market low. Had the market managed just a little bit higher and surpassed the 20% mark, it would have qualified for a new bull market.

That shouldn’t be the case. Shares are now down 14.4% from that high, and the US market index is down 22.8% so far in 2022. This leaves the index just 1.3% above its June 16 bear market low.

The other bad news for investors is that bonds continue to post losses. This means using traditional diversification strategies – like a 60/40 split between stocks and bondsdon’t offer much of a port.

Table showing quarterly market performance

There is not much optimism in the market given that the Fed has made it clear that an economic slowdown is needed to bring inflation under control.

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“There’s no reason why this (stock) market couldn’t go much further down,” Richard Weiss, chief investment officer for multi-asset strategies at American Century Investments. “If history is any guide, the market could easily drop another 10% to 20%.”

The following events are planned for the coming week:

  • Thursday: Bed Bath & Beyond (BBBY)and Nike (NKE) report earnings.
  • Friday: August update of the price index for personal consumption expenditure.

For the trading week ended September 23:

  • The Morningstar US Market Index fell 4.97%.
  • All sectors fell for the week, with energy the worst performers down 9.38% and consumer staples down 7.43%.
  • US 10-year Treasury yields rose to 3.69% from 3.45%.
  • West Texas Intermediate crude prices fell 7.48% to $78.74 a barrel.
  • Of the 851 US-listed companies covered by Morningstar, 35, or 4%, were up and 816, or 96%, were down.

Which stocks are up?

Packaged food stocks inched up, led by gains in General Mills (GIS) after the company reported first-quarter results that showed organic sales growth of 10%.

“We believe the company is also benefiting as consumers switch to eating food at home to fight inflation, according to management commentary and restaurant traffic data, which have eased in recent months,” said Rebecca Scheuneman, Sr Equity Analyst at Morningstar.

The company also raised its organic revenue guidance for fiscal 2023 to 5% to 6% from 4% to 5%. competitors Kellogg (k)Just good food (SMPL)Campbell Soup (CPB)and JM Smucker (SJM) saw their shares close higher.

Line chart showing some of the best performing stocks for the week of September 23, 2022.

Which stocks are down?

Cyclical stocks fell as the Fed’s latest rate hike coupled with comments from Chair Jerome Powell boosted expectations of a recession.

In response, investors sold shares in retailers including The RealReal (REAL)Farfetch (FTCH)and Wayfair (W).

Renewable energy companies also fell after the Fed meeting, continuing their volatility of the past few weeks. Among the industry’s biggest detractors were high-growth companies that have yet to become profitable, such as B. ChargePoint (CHPT) and power adapter (PLUG) .

“The impact of rising interest rates is more severe [for them] certain cash flows are more dated,” said Brett Castelli, Morningstar equity analyst.

Oil and gas companies at Antero Resources also fell on falling natural gas and crude oil prices (AR) and Patterson-UTI Energy (PTEN) to the biggest losers.

Chart showing some of the worst performing stocks for the week of September 23, 2022

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