Unpacking Q3 Stock Market Volatility

BY KENT SHAW, Portfolio Manager

Volatility in the stock market and the often associated news stories that sound increasingly gloomy can be unnerving. Our aim is to reduce our clients’ need to consume such information so they can be freed to pursue other goals.

The markets have experienced difficult times and the high volatility continues to show the unsettled environment with which we are living and trying to invest. The S&P500 has declined 24%  through September 30, 2022 and fell 5% for the quarter.  The yield on the 10-year US Treasury bond, which often affects home mortgage rates, reached as high as 4.00%, the highest level since 2011. At the September meeting of the Federal Reserve Bank, a rate hike of 0.75% was announced, largely as expected. However, the Fed indicated that they expected unemployment to rise to 4.4% next year, perhaps as a result of a recession. This change in language may be an indication that the chances of a “soft landing”, or a reduction in inflation without a recession, may now be nearing zero.

Recent portfolio developments and the case for incremental changes

A month ago, we believed that there was a good chance that the US would avoid a recession and that the Fed would soon temper their pace of rate hikes. Prices for a large number of commodities (copper, oil, lumber, wheat, gasoline) and services (shipping) had declined 20-60% over the prior 3-6 months, indicating inflation had most likely peaked. The Fed had previously changed their language to indicate their plans to raise interest rates would be “data dependent” going forward. In other words, they were open to slowing the speed of their interest rate hikes if there were signs of inflation slowing, which would be good for stocks.

However, when the inflation report for the Consumer Price Index (CPI) was released September 13th there was little sign that inflation had peaked and food inflation was greater than we expected. It appears that many companies are still aggressively passing on increases in prices even though some of their costs may be experiencing slower growth. The labor market is still very strong and it follows that companies see the consumer as strong, so price concessions are unnecessary. As a result of the stronger than expected CPI report and additional data on the strength of the labor market, accounts remain in a more defensive mode.

What next?

The Federal Reserve has made it very clear that they will raise interest rates until they are confident that inflation is abating and therefore a recession may occur as a result. Historically, when bear markets occur because of an economic slowdown or recession, the market bottoms before the recession is over. At that moment, the news is almost uniformly poor regarding stocks and the economy and investors disbelieve in the apparent improvement in the market. Currently, the Federal Reserve is uppermost in the minds of investors and we are entering a period where we believe we will see positive responses from stocks when we see negative economic developments such as slower growth and rising unemployment. These will be signs that the medicine being administered by the Fed is beginning to work.

Our team will continue to monitor portfolios and remain defensive until new information from the market and the economy suggest that risks are declining and improving market conditions are ahead. On a positive note, our research is yielding an increasing number of high-quality companies at attractive valuations. We plan to continue to do research on such companies but may be slow to add them to portfolios until market conditions improve. Furthermore, a large number of market behavior models we use for context in our decisions are at levels that have historically preceded strong stock market returns 12 months later but also much higher volatility in the near term. We find this information encouraging but await more clarity regarding inflation and the plans of the Federal Reserve Bank before significantly increasing equity exposure.

Large positive days are likely to occur in the market in the months ahead as high volatility brings us large positive as as well as large negative daily returns. It pays to be skeptical when such strong days occur as history tells us most of the large positive daily returns occur in bear markets and are thus a sign of noise not a new trend. This is one of the reasons we prefer a “weight of the evidence” approach that includes data from the market and the economy.

The information provided is for illustration purposes only.  It is not, and should not be regarded as “investment advice” or as a “recommendation” regarding a course of action to be taken. These analyses have been produced using data provided by third parties and/or public sources. While the information is believed to be reliable, its accuracy cannot be guaranteed.

Any securities identified were selected for illustrative purposes only. Specific securities identified and described may or may not be held in portfolios managed by the Adviser and do not represent all of the securities purchased, sold, or recommended for advisory clients.  The reader should not assume that investments in the securities identified and discussed were or will be profitable.


  • Kent Shaw

    In addition to serving clients as a Portfolio Manager at MONTAG for over a decade, Kent Shaw has experience navigating capital markets for 30 years as a currency trader for a large bank, and then as an analyst and portfolio manager for institutional clients. He also holds the designation of Chartered Financial Analyst. Kent uses a mix of qualitative and quantitative analysis of markets, the economy, and individual companies to find the investments best suited to his clients.

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