General | Sep 8, 2022
Volatility resurfaced in August and the summer rally died down after a chorus of Federal Reserve officials closed the door on a short-term dovish pivot and dashed hopes of a soft landing. Notably, officials signaled that the central bank would likely continue to raise interest rates and keep them high for some time to rein in stubbornly high inflation. Policymakers also pushed back on the idea that the Fed would soon reverse course and cut rates in 2023, while warning that restoring inflation to the 2% target would cause economic hardship for households and businesses. Equity and bond markets generated negative results in August, underscoring the merits of private market strategies in a well-balanced portfolio.
Global stock markets resumed their bearish trend in August as investors contemplated the Federal Reserve’s determination to fight inflation, even if it comes at the expense of growth. The MSCI All Country World fell 3.9%. Growth stocks bore the brunt of the pain as soaring bond yields weighed on the more expensive corners of the market, namely technology. The S&P 500 erased half of its early summer rally and fell 4.2% in August. The S&P/TSX fell a more modest 1.8%, while the MSCI EAFE lost 5% and the MSCI Emerging Markets Index ended the month unchanged.
Fixed income markets also generated negative results as central banks around the world stepped up their efforts to curb inflation. Bond yields jumped following President Powell’s much-anticipated appearance in Jackson Hole, where he reiterated that monetary policy will need to move “forcefully” and “deliberately” to bring inflation back to the 2 target. %. The Fed chief said the central bank would likely continue to raise interest rates and leave them high, signaled another “abnormally large” rate hike in September and pushed back on premature rate cuts. The yield curve flattened in response. Powell’s hawkish remarks saw the yield on two-year Treasuries rise 61 basis points to 3.49% in August, while the yield on 10-year Treasuries rose 54 basis points to 3 .19%. Longer-term bond yields remain below the yield on two-year Treasury bills, with markets widely expecting an economic slowdown in response to tighter policy. The FTSE Canada Bond Universe lost -2.7% in August, while the Barclays US Aggregate lost -2.8%.
In foreign exchange markets, the US dollar extended its relentless advance and hit a 20-year high after President Powell underscored the Federal Reserve’s unwavering commitment to containing inflation. This hawkish message was followed by similar rhetoric from a flurry of other Fed officials who reinforced the need to raise interest rates in tight territory and hold them there for some time. The US dollar strengthened against all of its major peers in August.
Finally, in commodity markets, crude oil fell for a third straight month amid growing fears that tighter monetary policy could dampen growth and demand for energy. Gold posted its fifth straight monthly decline as the dollar soared and falling Treasury yields dampened the appeal of the non-interest-bearing metal. Copper fell as global growth concerns gripped markets, with the energy crisis in Europe, monetary policy tightening and China’s Covid Zero strategy dampening the demand outlook for industrial metals.