2022 Third Quarter Commentary: The Gloves Are Off

Coming off another quarter of decline, the US economic outlook remains dismal. As the Federal Reserve forged ahead in its fight against inflation with additional rate increases, financial markets faltered in the face of depressed demand. As previously detailed, there are several geopolitical, economic, and liquidity-related challenges that require allocators’ attention as they navigate the market ahead. These matters are complicated by the unprecedented amount of debt and record high level of inflation in the economy. Given this set of circumstances, we may start to see politicians and central bankers taking an “all gloves off approach.” However, we anticipate that price discovery dynamics will continue to drive rotations across asset prices for the remainder of the year (both at the macro and micro levels).

In this commentary, we dive further into the current macro backdrop, review our asset class perspectives and offer insight on where we believe the economy and markets may go.


  • The global 60/40 portfolio[1] (the “benchmark” for investing) was down nearly -6% for the quarter and -21% for 2022. Though an equity/fixed income-only portfolio was once considered to be sufficiently diversified, this view is rapidly changing. We firmly believe that a fortuitous concurrence of low inflation and “easy money” bolstered this type of portfolio for years.
  • For the quarter, there were a few bright spots. Leading the way in daily liquid alternative strategies was systematic trend following, which delivered a +3.94% quarterly return, and is now up +22.65% on the year as a peer group (see chart in full commentary for daily liquid strategy performance). The other strategy that showed resilience and positive performance for the quarter was established multi-strategy private placement managers.
  • While the Fed’s rate hikes are making their intended impact on the economy and asset prices (a decreased wealth effect), core inflation and services-based inflation metrics remain elevated. Although a 3.7% unemployment rate may seem like a cause for hope, a closer look at the underlying consumer fundamentals reveals a more dire situation.
  • Equity markets posted negative returns during the quarter. Large-cap stocks represented by the S&P 500 index significantly underperformed, losing 5.28%. The Russell 2000 Index, which tracks small-cap companies, returned -2.53%. Growth-style stocks outpaced value by a little over 2.0%.
  • The US bond market (as proxied by the US Bloomberg Barclays Aggregate Bond Index) was down -4.70% during Q3. On the credit side, prices are generally cheaper. Investors can earn around 9% on high-yield bonds. With that said, we remain skeptical about these assets because, like equities, their valuation reset has been largely a function of rates and not credit/growth risk.

As we look forward to the close of the year, our playbook remains unchanged. We emphasize capital preservation and diversification through our alternative strategies. As markets continue to digest this period of price discovery, we believe our approach will prove to be highly valuable for client portfolios.

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[1] As represented by the Russell 3000 Index to represent the 60% equity exposure, an allocation of 40% to the Barclays Aggregate Bond Index for the fixed income allocation.

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