By Charles-Henry Monchau, chief investment officer at Syz Bank
The third quarter was a very volatile quarter for financial markets with an astonishingly wide set of declines across all the major asset classes. Indeed, after a dismal first half of the year, the vast majority of asset classes recorded a negative performance during Q3, as investors grew increasingly concerned about a looming recession due to a combination of hawkish central banks, major disruptions to Europe’s energy supply and looming sovereign debt crisis in the UK and potentially in Italy.
Story #1 — All main asset classes ended in the red
The third quarter was a very volatile quarter for financial markets with an astonishingly wide set of declines across all the major asset classes. Indeed, after a dismal first half of the year, the vast majority of asset classes recorded a negative performance during Q3, as investors grew increasingly concerned about a looming recession due to a combination of hawkish central banks, major disruptions to Europe’s energy supply and looming sovereign debt crisis in the UK and potentially in Italy.
In spite of a strong performance in July, the major equity indices all lost ground due to a decline which accelerated towards the end of the quarter. For both the S&P 500 (-4.9%) and Europe’s STOXX 600 (-4.2%), this is the first time since the Great Financial Crisis that they’ve lost ground for 3 consecutive quarters, with their year-to-day losses standing at -23.9% and -18.0%, respectively.
Due to persistent inflation and central banks that were more hawkish than expected, sovereign bonds had another poor quarterly performance. Gilts (-14.0%) were the worst affected given the market turmoil in the UK, although both US Treasuries (-4.4%) and European sovereigns (-5.1%) still lost significant ground. Combined with the losses over Q1 and Q2, that brings the year-to-date decline for US Treasuries to -13.4%, and for European sovereigns to -16.7%.
On the credit side, every single credit index we follow lost ground, across each of USD, EUR and GBP – and this for the 3rd consecutive quarter. GBP credit was by far the worst performer, with Investment Grade non-financial down -12.7% over the quarter, compared with -3.2% for EUR and -5.1% for USD.
After a strong first half of the year, there were broad-based declines across different commodity groups in Q3. Both Brent crude (-23.4%) and WTI (-24.8%) saw their worst quarterly performances since Q1 2020 (Covid lockdown). On a monthly basis, Brent Crude has now declined for four consecutive months for the first time since 2017. Both precious and industrial metals also struggled over Q3, with copper (-8.1%) and gold (-8.1%) losing ground as well.
Story #2 — A record drawdown for multi-asset portfolios
The “everything down market” continues to weigh on multi-assets portfolio performance. Looking at total return data going back to 1928 for the S&P 500, US 10-year and a 60/40 portfolio, there were only 5 years in which both S&P 500 and 10-Year Treasury Bond went down (1931, 1941, 1969, 2018, 2022). This year is the only year in history in which both S&P 500 and the US 10-year Treasury bond are down more than 10% each.
Story #3 — The biggest wealth destruction ever
The combined decline of equities and bonds just hit a new record: in the US, $57.8 trillion in stocks and fixed income market value have been destroyed since the 2021 peak. The big question mark is whether the housing market will be the next shoe to drop. Indeed, while housing prices stay stubbornly high, U.S existing home sales dropped for a seventh straight month in August as affordability deteriorated further due to surging mortgage rates.
