Bridge Perspective – October 2022

The Federal Reserve’s Battle with Inflation

Inflation continues to be the primary concern for the Federal Reserve and the markets. U.S. inflation eased slightly in August, while core inflation rose prompting the Fed to hike short term interest rates three quarters of one percent in July and again in September. They are continuing to be challenged by a strong labor market, supply chain disruptions and war.

To drive down demand driven inflation the Fed intends to increase unemployment which is a sad outcome but considered necessary by the Fed. There are bright spots and bittersweet spots in the Fed’s battle with inflation. The housing market has slowed due to mortgage rates now over 6% but shelter costs rose as rents increased. Energy prices fell during the third quarter but have recently risen due to the announced production cut by many of the oil producing nations. Bulk lumber prices quoted as one thousand board feet of lumber are now back to pre-pandemic levels, however the retail pricing of lumber at your local Home Depot or Lowes has not fallen back to the same level. The U.S. dollar has continued to appreciate which in the short term reduces our trade deficits and can make trips abroad less expensive. In the long term it makes U.S. goods more expensive to export and hurts the earnings of U.S. companies. On a positive note, supply chain disruption is decreasing. As you may surmise, our economy and the markets are woven together in a complex framework. The Fed’s actions will take time and create many bumps along the way.

Equity and Fixed Income Markets

Global stocks and bonds ended September with monthly and quarterly losses amid a volatile backdrop. Familiar challenges —persistent inflation, hawkish central banks, rising interest rates, weak economic data, and geopolitical tensions all continue to pressure financial markets.

The third quarter began on an optimistic note, with the S&P 500 Index rallying more than 9% in July amid hopes for a Fed policy pivot. But that sentiment faded, as the Fed reiterated its intentions to aggressively hike rates until inflation retreats. Stocks declined more than 4% in August, more than 9% in September, and nearly 5% for the quarter. Year to date, the S&P 500 lost 24%, finishing in bear market territory for the second consecutive quarter. All sectors of the S&P 500 Index declined in September. Consumer discretionary and energy were the only sectors posting gains for the third quarter. U.S. stocks (S&P 500) and other international developed markets posted similar losses in September. However, U.S. stocks fared better on a quarterly basis. Emerging markets stocks underperformed developed markets for both time periods.

Consistent with the equity markets, the third quarter of 2022 was also difficult for the fixed income markets. The Bloomberg US Aggregate Bond Index returned -4.32% for the quarter and is down 14.61% year to date. Among positive factors are U.S Treasury Bills with maturities from 6 months to 2 years, which are yielding around 4% and are also state tax free. Another positive is that yields on intermediate bonds have increased with a 3-year AA rated US corporate bond yielding 5% as of the writing of this article. Looking forward, our economy and the markets are complex and affected by events around the world.  In memory of Queen Elizabeth II, may the chart below remind us of the quote “Keep calm and carry on”.  The chart below shows data from 1947 to 2021 market downturns, recessions and the growth of a dollar in the U.S. market.

The Economy and Stock Market have Overcome Many Rough Periods Throughout History


  • Chart Data from 1947 – 2021. The market is represented by the CRSP U.S. Total Market Index. Source: Avantis Investors. U.S. real GDP data from Federal Reserve Economic Data (FRED). Past performance is no guarantee of future results.
  • Article adapted from Avantis Investors Monthly ETF Field Guide.
  • From Wikipedia, Keep Calm and Carry On was a motivational poster produced by the Government of the United Kingdom in 1939 in preparation for World War II. The poster was intended to raise the morale of the British public. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.

Bridge Advisory LLC Disclosures

Bridge Advisory, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. Investment Advisory Services offered through Bridge Advisory, LLC.

Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Information herein has been obtained from sources believed to be reliable, but Bridge Advisory, LLC. does not warrant its completeness or accuracy; opinions and estimates constitute our judgment as of this date and are subject to change without notice. This newsletter expresses the views of the authors as of the date indicated and such views are subject to change without notice.

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