September was a challenging month for equity markets with the S&P 500 declining by 9.21%. This brought the Q3 return to a decline of 4.88% resulting in year to date 2022 returns of -23.87%. This is the worst start to a calendar year since 2002. Inflation, geopolitical risk, rising interest rates and the outlook for continuing Fed rate hikes were the primaryheadline drivers for the poor performance. Fed chairman Jerome Powell made itclear that the Fed is still targeting inflation of 2%. Unfortunately, headline inflation remained elevated well over 8% year over year. Prices for durable goods remain stubbornly high and have contributed significantly to the inflation outlook. As such, the Fed continued to raise rates with a 0.75% increase in September bringing short term rates to 3.25%
As noted in our June update, the war in Ukraine continues to grind on with signs that Russia is struggling to meet its objectives. The war has caused prices of natural gas to surge, putting Europe at a high probability of recession. The United States is now the largest exporter of natural gas to Europe. Rising rates have resulted in large losses in long dated US government bonds. It appears that the deleveraging of the Fed’s balance sheet has begun in earnest with selling of investment grade bonds causing performance in that sector to lag their high yield counterpart.
Our models held their ground during the quarter with our Diversified Portfolio declining by 2.85% bringing year to date returns to 10.78%. By contrast the S&P 500 declined by 4.88% for the quarter and is down 23.87% year to date. We were pleased that our strategy held up so well in the face of a large decline in the markets we trade especially in September where the Diversified Portfolio made money and the market experienced a large decline. Returns were helped in large part by our Hybrid Momentum Model which posted double digit gains for the quarter. The Counter-Trend and Relative Value models were detractors from results. Nevertheless, diversification proved beneficial during the quarter and has led to our double-digit gains for the year compared to significant market losses.