Third Quarter 2022 Review

Inflation and central bank policy continue to be at the center of investors focus. As detailed in our Q2 letter, Private Wealth Partners sees inflation as stickier than in past cycles. Even though there are growing signs inflation pressures may abate in the coming months, we think risks will remain in the stock and bond markets until inflation comes down meaningfully.

That did not happen in July or August, as inflation essentially plateaued at elevated levels while the labor market continued to post relatively strong job and wage gains. The July stock market rally quickly faded, and the S&P 500 index ended the third quarter with a -4.9% loss.  

Looking out to Q4 and beyond, the risk of recession has clearly risen with falling profit margins, a weakening housing market, and an inverted yield curve. Nevertheless, investors should keep in mind that bull markets typically start during a recession, around 6-9 months before a trough in earnings. Equity markets have also done very well once CPI peaks and comes down, and also when growth is weak but improving (rather than when it is strong but slowing).

In our view, we may be closer to reaching these conditions than most appreciate.