Global equity markets continued to move lower in the third quarter with great uncertainty regarding inflation expectations and the potential economic impact resulting from Federal Reserve actions. Fixed income didn’t provide diversification benefits as returns were also quite negative as interest rates continued to increase during the quarter.
After the economy accelerated in 2021, 2022 has seen two straight quarters of economic (GDP) declines. Inflation continues to be a headwind with rising rates making the probability of a recession more likely, while strong job growth and demand for labor may offset and lead to a softer landing. Large-cap stocks (S&P 500 Index) were down 4.88% in the quarter, while small-cap stocks (Russell 2000 Index) were down 2.19%. International developed stocks (MSCI EAFE Index) were down 9.36% for the quarter, and emerging market equities (MSCI EM Index) were down 11.57% for the quarter.
Fixed-income returns were also negative during the quarter, except bank loans. The U.S. 10-year Treasury yield started the quarter at 2.88% and ended at 3.83%. Third quarter performance for the Barclays Government Credit Index, a proxy for the broad U.S. fixed-income market, was down 4.56% in the quarter; bank loans were up 1.37% in the quarter; high-yield bonds were down 0.64% in the quarter; and emerging market debt was down 4.73%.
The Stable Value Fund continues to be a solid performer, with slightly positive performance of 0.26% for the quarter.
The Bond Fund was down 3.67% for the quarter, with all underlying asset class performance being negative except bank loans due to increasing interest rates and inflation concerns.
The Sustainable Balanced Fund, which has allocations to both sustainability-focused equity and fixed-income managers, was down 5.82% for the quarter. Underlying managers specialize in Environment, Social, and Governance (ESG) leaders.
The Target Annuitization Date (TAD) Funds, which have allocations to the Bond Fund as well as to the Equity Fund (and in a few of the TAD Funds, the Stable Value Fund), had performance between -2.77% and -5.28% for the quarter.
The Equity Fund was down 5.59% for the quarter. Hedge fund strategies helped the Fund mitigate the negative equity markets. Growth-oriented stocks, although negative, had better relative performance after two quarters of value-oriented stocks having strong relative performance.
The Global Sustainability Index Fund (GSIF) was negative, with a return of -7.82% for the quarter.
The Basic Annuity essentially has been protected from interest rate volatilities since 2016, with the addition of sophisticated risk and monitoring tools and the hiring of a new manager, Voya. As a result, the funded status (our assets to the present future value of all our promises to annuitants) is still high and stable.
In the Participating Annuity, the funded status (our assets compared to our future promises to our annuitants) has stayed steady so far in 2022.
As a retirement investor, you should focus always on the appropriate asset allocation, or mix among stocks, bonds, and cash/stable value investments, and your long-term retirement objectives. It is rarely wise to react to shorter-term market movements. The easiest way to avoid that is to invest in the Target Annuitization (TAD) Fund nearest to your retirement date. As of January 1, 2021, there are now two new TAD Funds (2045 and 2050) available. Again, these funds are more focused on growth early in your career, and become more conservative as retirement approaches, by owning fewer equities and more bonds and stable value investments.
Our capable and responsive Member Services staff is available to assist you. Please contact the Pension Boards at 1.800.642.6543 with questions about fund information, performance, strategy, and approach.
If you have questions about your unique financial situation, please contact an Ernst & Young financial planner, available at no cost to you through our partnership with EY. Visit the EY Navigate™ website or call the EY Navigate™ Financial Planner Line at 1.877.927.1047, Monday through Friday from 9:00 a.m. to 8:00 p.m. (ET).