MARKET COMMENTARY
The third quarter began on optimistic footing, as investors contemplated whether inflation had peaked, sparking hopes that
the Fed would ease off further rate increases. This led to an S&P 500 relief rally of nearly 14% through mid-August and
over 17% from June lows. Soon thereafter, the hawkish tone of Federal Reserve Chair Powell’s speech at Jackson Hole
followed by a hotter than expected August inflation report reversed market sentiment as markets declined for the remainder
of the quarter erasing any gains from the rally and ending in further negative territory. There continue to be very few places
for investors to hide, with a traditional 60/40 portfolio invested broadly across stocks and bonds down approximately -5%
during the quarter and -21% year-to-date, its fourth worst drawdown in 50 years.
Even as oil prices fell from $110 to $79/barrel, headline inflation remained elevated throughout the quarter with the majority
of categories of inflation remaining persistently high. Inflation has been driven by increased core inflation which excludes
food and energy prices and rose to a 40-year high of 6.7% in September. At the September Federal Reserve meeting, the
Fed Funds rate was raised by 75 bps for the third time in a row and provided firm messaging of their intentions to be
aggressive as it takes to tame inflation. The more persistent and broader-based inflation readings since the Fed last
provided forecasts in June have opened the door for a steeper rate-hiking path, with Fed officials increasing the median rate
trajectory for 2022 and 2023 by 75 to 100 bps. These developments have challenged the probability of the Fed engineering
a soft landing, as Chair Powell stated some economic pain may be necessary to bring inflation back to target, with
unemployment rate projections also revised upwards to 4.4% in 2023, 50 bps higher than the 3.9% projected back in June.
For these reasons, fixed income markets remained under pressure in Q3 2022, with the Bloomberg U.S. Aggregate Index
and U.S. Investment Grade Corporates down -4.8% and -5.1%, respectively. For the year, U.S. Investment Grade Corporate
bonds have slumped 18.7%. High yield bond spreads ended the quarter at 550bps, and treasury yields saw upward
movement across the curve compared to the end of June, with the 2-year increasing from 2.92% to 4.22% and the 10-year
increasing from 2.98% to 3.83% by the end of September.
The S&P 500 and Dow ended the third quarter down -4.9% and -6.2%, respectively, whereas the Nasdaq ended the quarter
down -4.6%. Non- US markets were hit harder with the MSCI World Index was down -6.1% and the MSCI Emerging
Market Index down -11.4%.
ALTERNATIVE INVESTMENT COMMENTARY*
Hedge funds struggled at the close out of the third quarter of 2022, with the HFRI Fund-of-Funds Composite Index falling
-0.69% for the quarter and -7.24% for the year. For context, the last time the HFRI Fund-of-Funds Index fell for three
consecutive quarters was in 2011. As noted above, global markets started the quarter on a positive trend, as many
investors saw June lows as a favorable opportunity to enter the market. However, following increasing inflationary
pressures and adamant sentiment from global central banks on quantitative tightening, markets began a selloff as the S&P
500 reached a bottom not seen since 2020, erasing all equity gains made over the past two years. Alternative strategies
that performed well during the quarter were ” Global Macro” and “Equity Market Neutral,” rising 1.69% and 0.92%,
respectively. Conversely, “Event Driven” and “Relative Value” strategies trended downward, falling 0.69% and 0.49%,
respectively. The cadre of managers utilized by FMC experienced similar results with market neutral outperforming while
others underperformed. However, we are confident in our managers’ ability to preserve capital and navigate the extreme
volatility s in today’s markets to close out 2022 and beyond.
*Data taken from HFRI (Hedge Fund Research Indices) as of October 17, 2022. The indices are updated multiple times a
month as underlying funds report their performance. The performance numbers above may change depending on the
timing.
This material contains the current opinions of Family Management Corporation and its affiliates (collectively, “FMC”), which may change without notice. This material is distributed for informational purposes only. It is not a recommendation or offer of any investment or strategy. Nothing herein shall be considered a solicitation to buy or sell, or an offer to buy or sell, to or from any persons in any jurisdiction where such solicitation, offer, purchase, or sale would be unlawful. Information contained herein has been obtained from sources believed to be reliable, but are not guaranteed. FMC provides no guarantees regarding the performance of any investment or strategy. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future performance and individual client results will vary. No part of this material may be reproduced in any form, or referred to in any publication, without the express written permission of FMC.
