The financial markets had another difficult quarter. Early on, stocks regained some lost ground amid signs of continuing strength in the labor market, corporate earnings that were more resilient than expected, and a moderation in inflation expectations as energy prices cooled.
Stocks reversed course, however, as broader price increases kept inflation stubbornly high, prompting more aggressive tightening by the Federal Reserve to bring it back in check and raising the odds of a global recession. Stocks overall declined for the period, with Europe and emerging markets among the laggards.
U.S. stocks fared better but still ended in negative territory.
Bonds initially made gains as well, buoyed by the prospect that weak growth could pave the way for a moderate path forward for monetary policy. But as the quarter progressed, they also reversed course as inflation persisted.
Yields of U.S. Treasuries rose, and prices fell across the maturity spectrum, with more movement at the shorter end of the curve because of the steep rate hikes by the Fed. The broad U.S. investment-grade bond market declined by close to 5% (as measured by the Bloomberg U.S. Aggregate Float Adjusted Index).
U.S. bond market
- The broad bond market returned –4.68% for the quarter, as measured by the Bloomberg U.S. Aggregate Float Adjusted Index. In general, higher-quality bonds with shorter maturities held up the best. Within the corporate sector, bonds of financial institutions (–4.24%) did better than those of industrials (–5.40%) and utilities (–5.96%).
- The Federal Reserve approved interest rate increases of 0.75 percentage points in July and September, to a range of 3%–3.25%. The yield of the bellwether 10-year Treasury note finished the quarter at 3.83%, up from 3.01% three months earlier.
- For the 12 months, the broad U.S. bond market returned –14.61%.
U.S. stock market
- For the quarter, the broad-market Russell 3000 Index returned –4.46%. Small-capitalization stocks held up better than large-caps, and growth stocks outpaced value stocks.
- For the 12 months that ended September 30, the Russell 3000 Index returned –17.63%, with technology, consumer discretionary, and industrials among the hardest-hit sectors.
- Money market yields rose during the quarter. As of September 30, the yield on Vanguard Federal Money Market Fund stood at nearly 3% with a weighted average life of 44 days. The fund maintained its high-quality portfolio and benefited from broad diversification and low fees.
International stock market
- Emerging markets stocks (–9.93%) outpaced European stocks (–10.73%) for the quarter. Within developed markets, the Pacific region (–8.73%) also outpaced Europe.
- For the 12 months, stocks outside the United States returned –24.76%, as measured by the FTSE All-World ex U.S. Index. Technology, industrials, and financials were among the worst-performing sectors.
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