The Fed’s continuation of rate hikes in September to fight rising inflation, economic growth and geopolitical risk concerns, and a soaring US dollar combined to drive losses across all asset classes in Q3.   During past inflationary environments, inflation came in waves. This time will be no different. As supply induced inflation begins to decline over the coming months, real wage growth – which is negative – will turn positive. Real disposable income will rise. Aggregate demand will increase, pushing back up the steep side of the aggregate supply curve. With global growth on the upswing, commodity prices are expected to recover, causing a second inflation wave.

A second inflation wave will counter the belief that the neutral interest rate is low. After pausing its interest rate tightening campaign, the Fed is expected to begin hiking again in the second half of 2023, bringing the Fed funds rate and U.S. mortgage rates high enough to hit the housing market and the rest of the economy.

Europe will experience a different recovery than in North America, following the Russia imposed energy crisis and as China loosens its zero-Covid policy. Oil prices propelled higher following a decision by OPEC+ to make sizeable cuts to output that tightened supplies in an already strained market. The cuts take effect from November and are the start of an uncertain period for oil supplies heading into the winter, with the European Union set to implement sanctions on Russian flows in December. A recession in the eurozone during the fourth quarter of 2022 and first quarter of 2023 is expected, following deteriorating growth prospects in export markets including the United States and the United Kingdom. Both are expected to enter recessions shortly. In October we maintained our twelve-month forward outlook for the U.S. economy of six months of Recession followed by six months of Stagnation.

The Chinese economy advanced 3.9% year over year in Q3 of 2022, boosted by various measures from Beijing to revive activity. For the first nine months of the year, China’s GDP grew by 3%.1 The latest figure was released just a day after President Xi Jinping secured a historic third term. China’s surveyed urban unemployment increased to 5.5% in September 2022 from 5.3% in August.2 The Eurozone annual inflation rate was revised slightly down to 9.9% in September 2022, the highest rate since comparable records began in 1991, as the bloc’s energy crisis deepened.3 The unemployment rate in the Euro Area fell to a record low of 6.6% in September from an upwardly revised 6.7% in the prior month.4

The U.S. economy grew an annualized 2.6% in Q3 2022, rebounding from a contraction in the first half of the year. The biggest positive contribution came from net trade. Imports sank 6.9% while exports were up 14.4%, led by petroleum products.5 The U.S. unemployment rate fell to 3.5% in September 2022.6 The annual inflation rate in the U.S. slowed to 8.2% in September of 2022. The energy index increased 19.8%, due to gasoline, fuel oil, and electricity. Meanwhile, the core rate – which excludes volatile food and energy – rose to 6.6%, the highest since August of 1982, in a sign inflationary pressures remain elevated.7 Canada’s annual inflation rate slowed to 6.9% in September of 2022, below the 39-year peak of the 8.1% hit in June.8 The unemployment rate in Canada eased to 5.2% in September of 2022.9

Despite making a comeback in July and the first half of August, the S&P 500 slumped to a loss of 4.9% for the quarter while the S&P Mid Cap 400 and S&P SmallCap 600 declined by 2.5% and 5.2%, respectively. Treasury yields continued rising across the curve, resulting in U.S. fixed income index performances mostly negative. Canadian equities slumped into late September and all major indices finished down by single digits in Q3, with the S&P/TSX Composite falling by 1.4%. As central banks globally followed the Fed’s lead, international equities also suffered. The S&P Europe 350 dropped 6.2% in September and 4.04% in Q3, for its third straight quarter of losses. All constituent countries contributed to the S&P Europe 350’s losses, with the S&P United Kingdom pulling down the index most, off 3.1% in the 3rd quarter. The S&P Pan Asia BMI plunged 11.4% in September with all its components down for the month. Japan detracted most from the regional bellwether’s return, dragging the S&P Pan Asia BMI lower by 3.1%. Crude oil remained in a tug-of-war between the deteriorating economic landscape and supply-side risks in October. Gold posted its seventh straight month of declines in its longest losing streak since the late 1960s as rising treasury yields weighed on the non-interest-bearing metal. The stronger US dollar and a deteriorating global demand outlook offset gold’s ability to be a store of value.

In October, our optimization process was unable to identify portfolio solutions for any of our Model Risk Thresholds. With this guidance, we maintained our asset allocation, including the twenty percent cash position across all models.

We are currently positioned for a recession in the U.S. in the next two quarters. Inflationary pressures continue and central banks are steadfast in targeting job growth and core inflation and a second wave of inflation is anticipated.  Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.


Deborah Frame, President and CIO


1 Trading Economics. China GDP. October 22, 2022.

2 Trading Economics. Unemployment. October 24, 2022.

3 Trading Economics. Europe Inflation. October 21, 2022.

4 Trading Economics. Europe Unemployment Rate: Eurostat. November 3, 2022.

5 Trading Economics. U.S. GDP Growth. October 27, 2022.

6 Trading Economics. U.S. Unemployment: U.S. Bureau of Labor Statistics. November 4, 2022.

7 Trading Economics. U.S. Inflation. October 13, 2022.

8 Trading Economics. Canada Inflation. October 19, 2022.

9 Trading Economics. Canada Unemployment: Statistics Canada. October 5, 2022.


Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. September 30, 2022. Index performance is based on total returns and expressed in the local currency of the index.