Friends,

The global markets struggled in the final month of the third quarter. Almost every financial asset underperformed with the notable exception of oil as inflation fears weighed on the market. As we continue to talk about, the market is very concerned inflation is not temporary or “transitory” as the Federal Reserve suggests.

In the US, the S&P 500, Nasdaq 100, and Russell 2000 growth indexes all fell in September dropping 4.80%, 5.62% and 3.62% respectively.

Internationally, the Hang Seng continued to underperform slipping another 5% in September and 10% year to date. European indexes also were down approximately 3-4%.

Crude Oil was up almost 10% in September touching a 3-year high close to $80 a barrel. Natural Gas was up another 30% in September. Natural gas is now at an 8-year high.

As we talked about in our August newsletter, home heating costs this winter will be appreciably more

expensive than last year as natural gas has now doubled in price since the fall of last year.

Prolongated inflation is problematic for the bond market as purchasing power erodes the value of cash flows generated from interest payments. Global bond investors are facing their worst year at this point in more than 2 decades. Bloomberg’s Global Aggregate Index, a benchmark for government and corporate debt, has lost over 4%. Currently, the market is pricing in the first-rate hike in the 4th quarter of 2022.

Below is a graph comparing US Treasury Bond rates from a year ago. As you can see 10-year rates are 80 basis points higher. This movement equates to a 7% price reduction. Also, interesting to note in how longer-term rates are increasing at a faster pace than short term rates. This is what is commonly referred to as a “steepening” yield curve and is a common bond market reaction to inflation.

SOURCE: BLOOMBERG

As always, if you have any questions feel free to reach out.

Best, Bob

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