Developed Markets Falter
In the month of September, international developed stock markets returned -9.26%. Canada and Europe ex UK recorded returns of -8.51% and -8.65%, respectively. Japan and Pacific ex Japan lagged other markets. International developed markets are down -26.23% YTD while the U.S. market is down -25.08%. Developed markets in Europe and Asia have actually outperformed the US market based on local currency returns; the strength of the US dollar has strongly penalized market returns outside the US this year. Central bank tightening continues to be a market headwind. The Federal Reserve is expected to raise short-term interest rates again in November and December.
Emerging Markets Drop
Broader emerging markets posted a -10.59% return for the month. Mexico and Brazil recorded returns of -0.41% and -3.33%, respectively. Korea and China lagged other markets in September. Countries that export natural resources, such as Brazil, have benefited from this year’s inflationary environment. High local interest rates, energy and food prices have been headwinds to emerging market economies. China’s zero-Covid policy has also been a drag on economic activity.
Healthcare and Materials Sectors Holding Up Well
Healthcare and materials recorded returns of -3.88% and -7.98%, respectively, in September. Telecommunications and information technology lagged other sectors this month. The energy sector declined 9.63% in September but remains up 22.7% YTD and 29.1% over the past year. Global oil and gas supply and demand dynamics will most likely continue to be favorable in the short and medium term.
DOMESTIC EQUITY FACTORS
Value Maintains Edge in 2022
In September, value outperformed growth in the large-cap space but underperformed in the small-cap space. Momentum recorded a return of -8.16%. Value stocks are still outperforming growth in 2022. Their ten-year annualized returns are approaching growth’s ten-year return. Even after value’s strong performance, value stocks are still cheap relative to growth stocks. Value-oriented sectors such as energy, financials, and materials may still have much more room to run.
FOREIGN EQUITY FACTORS
Value Outperforms in the International Markets
In the international developed markets, value outperformed growth in the large-cap and small-cap space for the month. Momentum recorded a return of -8.79% while small-cap emerging market stocks posted a return of -10.64%. Valuations of value stocks are still very low relative to growth stocks in both international developed and emerging markets, which is consistent with the US market. Rising interest rates may also pose more of a risk to growth stocks than value stocks.
Short-Term Interest Rates Rise
In September, the three-month Treasury bill index returned 0.25%. From the beginning of the year through the end of September, the interest rate on the 90-day Treasury bill increased from 0.08% to 3.33%. Savers are now getting paid much more in interest; however, they will still face low real interest rates if inflation remains high, which has compromised purchasing power despite the increase in rates. The CPI has increased by 8.25% over the past year through the end of August.
DISINFLATION DEFLATIONARY HEDGES
Fixed Income Investments Decline
The returns of deflationary hedges were mostly negative for the month. The Bloomberg Barclays U.S. Agg Bond Index returned -4.32% for the month. High-yield bonds are down -14.62% YTD. During the first half of the year, longer maturities were penalized when interest rates rose; during the third quarter the credit aspect of fixed income declined due to increasing recessionary expectations. If interest rates continue to rise, less creditworthy borrowers may face difficulties meeting their financial obligations. This year, fixed income investments have failed to protect investors’ portfolios. The U.S. Agg Bond Index is down -14.61% YTD.
INFLATION SENSITIVE INVESTMENTS
Commodity Markets Drop Over Fears of a Recession
Inflation-sensitive investment returns were negative for the month. Gold bullion and inflation-indexed bonds ex US returned -2.57% and -5.99%, respectively, in September. The Bloomberg Commodity index posted a return of -8.11%. Gold bullion is down -7.43% YTD. The US dollar has materially strengthened this year, moderating gold’s return in US dollar terms. However, gold bullion is up much more relative to other major currencies. Like oil’s future supply prospects, the future supply of gold may be constrained as exploration and capital expenditures have only slightly increased this year.
U.S. Dollar Strengthens Versus Other Currencies
Over the past three months, the U.S. dollar appreciated against most major currencies except for the Mexican Peso. However, the continuation of U.S. fiscal deficits may weigh on the U.S. dollar in the medium-term to long-term. Gross federal debt to GDP stands at 121% and is forecasted to increase through the decade.
Brandon Yee, CFA, CAIA – Research Analyst
Brandon conducts investment due diligence for Versant Capital Management, and designs and implements tools and processes to support the firm’s research. His background in biology and finance help him to look at challenges from multiple angles, resulting in unique and well-rounded approaches and solutions.
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