U.S. investors brace for wilder market swings after dizzying third quarter – Reuters

NEW YORK, Sept 30 (Reuters) – In a year of wild market swings, the third quarter of 2022 was a time when events took a truly extraordinary turn.

As the Federal Reserve stepped up monetary policy tightening to rein in the worst inflation in decades, US Treasury yields hit their highest levels in more than a decade and stocks reversed a summer rally to plunge into new depths.

The S&P 500 (.SPX) is down nearly 24% year-to-date, while yields on the benchmark 10-year Treasury note, which move inversely to bond prices, have recently reached their highest level since 2008.

Outside the United States, the soaring dollar has caused sharp declines in global currencies, prompting Japan to support the yen for the first time in years. Meanwhile, a fall in UK government bond prices forced the Bank of England to make temporary purchases of long-dated gilts.

Many investors are looking ahead to the next three months with trepidation, betting that the sell-off in US equities will continue until there are signs that the Fed is winning its battle against inflation.

Still, the last quarter of the year has often been a good time for US equities, raising hopes that markets have already seen the worst of the selloff.

SKIP THE DIP

The strategy of buying stock market declines has yielded rich rewards for investors in the past, but failed badly in 2022: The S&P 500 has risen 6% or more four times this year and then hit a new low each time. time.

In the third quarter, the index rose almost 14% before reversing to hit a new two-year low in September after investors recalibrated their expectations for even more aggressive Fed tightening.

WATCH BELOW?

While several major Wall Street banks expect the benchmark to end the year below current levels – Bank of America and Goldman Sachs both recently released year-end targets of 3,600 – the outlook for falling purchases remains cloudy.

Furthermore, the current bear market, which has so far lasted 268 days and seen a decline of around 24% from peak to trough, is still relatively short and shallow compared to past declines. Since 1950, the average bear market has lasted 391 days with an average peak-to-trough decline of 35.6%, according to Yardeni Research.

SEE OBLIGATIONS

Although equities have been volatile, bond market swings have been comparatively worse.

The ICE BofAML US Bond Market Option Volatility Estimate Index (.MOVE) hit its highest level since March 2020 as the ICE BofA US Treasury Index (.MERG0Q0) is on track for its biggest annual decline ever recorded.

By comparison, the Cboe Volatility Index (.VIX) – Wall Street’s so-called “fear gauge” – failed to hit its March peak.

Some investors believe the market turmoil will continue until bond markets calm down.

“I think there’s a good scenario where once we get through the violence in the bond market, we hit a more tradable bottom (for equities),” Michael Purves, managing director of Tallbacken Capital Advisors told New York. York.

…AND THE DOLLAR

Soaring US interest rates, a relatively robust US economy and investors’ search for safe havens amid rising financial market volatility boosted the US dollar – at the expense of other global currencies.

The greenback is up around 7% for the quarter against a basket of currencies and is near its highest level since May 2002. Dollar strength prompts the Bank of Japan to support the yen with interventions while presenting a headwind on earnings for US companies.

“Market risk takers are grappling with the twin threats of continued dollar strength and dramatically higher interest rates,” Jack Ablin, chief investment officer at Cresset Capital, said in a note.

BENEFIT TEST

Third-quarter earnings could present another hurdle for markets as companies factor in everything from dollar-fueled currency headwinds to supply chain issues.

Analysts have become more optimistic about third-quarter earnings growth, with consensus estimates falling to 4.6% from 7.2% in early August, according to Refinitiv IBES. So far, that’s only marginally worse than the 2.2 percentage point median decline before the benchmarks, but warnings from companies such as FedEX (FDX.N) and Ford (FN) have hinted the possibility of more pain to come.

IT’S THE SEASON

The calendar may offer some hope to weary stock market investors.

The fourth quarter is historically the best time for returns on major U.S. equity indices, with the S&P 500 (.SPX) posting an average gain of 4.2% since 1949, according to the Stock Trader’s Almanac.

Reporting by Saqib Iqbal Ahmed and Lewis Krauskopf; Editing by Ira Iosebashvili and Marguerita Choy

Our standards: The Thomson Reuters Trust Principles.