The third quarter offered few corners to hide as investors shunned risk in most of its forms, with U.S. bonds seeing declines of historic proportions as stocks fell anew upon reemergent fears of a potential recession caused by efforts to combat long-lasting inflation. U.S. stocks continued to outperform non-U.S. stocks, with the strength of the U.S. dollar comprising a substantial portion of that outperformance. The quarter’s performance reflects a reversal of optimism for quick and painless taming of global inflation. Rising rates—the primary method being implemented to combat excess inflation—ensured fixed income would fail to offset stock declines. The quarter’s events also reminded investors that such dire circumstances require defensible, steadfast and sincere policies.

The U.S. investment-grade bond market sits near its deepest drawdown since 1976, having plunged more than 16% since August 2021. Despite the “inversion” of the curve (longer-term rates rose less than shorter-term rates), longer-maturity bonds felt the impact of rising rates far more severely than short-duration bonds. Rates rose through most of the quarter...somewhat haltingly on the long end as investors balanced the potential for a recession against the likelihood rates will be higher for longer. Both term spreads (the higher yield required to take on interest rate risk) and credit spreads (the higher yield required to take on default risk) reflect fears of a potential recession brought on by central bank efforts to combat persistent inflation.