September 2022 Market Update
Figure 1: S&P 500 index, Jan 1 2022 - Sep 30 2022
Throughout September, many G7 nations observed higher-than-anticipated inflation readings, ensuing aggressive rate hikes around the world with indications of further hikes to follow. A recession is looking increasingly likely, with the stock market falling back into bear territory, reversing all of its summer gains and reaching new year-to-date lows. The S&P 500 ended September down over 9%, bringing its year-to-date return to -25.25%.
The U.S. Federal Reserve announced a 75 basis point (bps) interest rate hike in September, following a larger than anticipated annualized headline inflation rate of 8.3% for August, a small decrease from an annualized 8.5% in July. Core inflation was an annualized 6.3% in August, advancing from July, driven by increases in rent and mortgage rates. The U.S. federal funds rate reached its highest level since 2008, with market participants now anticipating and pricing in a rate upwards of 4.5%. Alongside the U.S. Federal Reserve, the Bank of Canada and European Central Bank raised rates by 75 bps, and the Bank of England raised rates by 50 bps.
Figure 2: Pound Sterling vs USD
Following the resignation of British Prime Minister Boris Johnson, Liz Truss was sworn in as the new Prime Minister on September 6, days before the death of Queen Elizabeth II. Within days of her ascension, Truss announced an economic support package encompassing a series of tax cuts and relief measures to blunt the impact of increasing energy prices. Market participants reacted unfavorably to this announcement, based on the fear that the policies would have the effect of exacerbating the inflation crisis and swell national debt. Consequently, the British Pound fell to more than a decade low against the USD.
The Russia-Ukraine war escalated further, as Russian leaders declared victory in a series of staged referendums to annex four regions of occupied Ukrainian territory. The Kremlin announced that the regions, which compose nearly 15% of Ukraine, will be absorbed into the Russian Federation. The U.S. and members of the E.U. have denounced the move, alongside Ukrainian President Zelensky, stating that it is a violation of the United Nations Charter. Exacerbating the conflict, both the Nord Stream 1 and 2 natural gas pipelines experienced unusual leaks in September; these were speculated to be the result of state-sponsored sabotage, adding further pressure to the energy crisis in Europe. With Russia likely to blame for the suspected sabotage, the E.U. is meeting to propose further sanctions on Russia, alongside relief measures for European energy.
Heading into quarter four of 2022, interest rates will likely remain high until inflation moves back down to reasonable levels. Lower commodity prices, reduced supply chain congestion and slowing growth should begin to provide some relief; however, persistent inflation and monetary tightening appear increasingly likely to cause a recession to materialize.
