Markets struggled in the third quarter due to the synchronized global downturn. With the Federal Reserve making clear its intention to keep rates higher for longer, these challenges will likely continue to plague markets through the remainder of the year and into 2023.

Historical interest rates
10-year and 2-year yields since 1960

Line graph showing historical interest rates and 10 and two-year yields from 1960 to October, 2022.

Clearnomics, Standard & Poor's, Principal Global Investors. Data as of October 4, 2022.

Investors continued to face historic challenges in the third quarter, with all major indices entering bear market territory. Accelerating core inflation, rapidly rising rates, and a synchronized global economic downturn weighed on equities and fixed income. The S&P 500, Dow and Nasdaq fell 5.3%, 6.7% and 4.1%, respectively, while the 10-year Treasury yield climbed above 4% briefly. Although markets did rally from June to August, this quickly reversed when Fed Chair Powell suggested that the Fed would keep rates higher for longer as the central bank doubles down on its inflation fight.

These challenges will likely continue through the fourth quarter and into 2023, with markets struggling to digest the higher for longer narrative, and the accompanying possibility of a “hard landing” that could risk a recession. The Euro area is already contracting as it continues to deal with energy price spikes and shortages.

The macro environment, and thus today’s investing landscape, is almost completely dependent upon upcoming inflation readings. While the August data showed that energy prices in the U.S. improved significantly, core inflation, which excludes the often-volatile food and energy prices, reaccelerated—driving the Fed’s desire to move inflation back toward target levels and avoid a wage spiral.

Despite the year-to-date declines, global valuations are still not particularly appealing. Investors should continue to move to a more defensive mix by underweighting equities and fixed income, and focus further on real assets.


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