Mercer market review 

Markets can move rapidly and conditions can change based on macro- and micro-economic news and data. At times, it can be difficult to keep up and to determine the important information from the noise.

Our global investments analysts and researchers, and market and asset class specialists, are constantly monitoring markets to identify the most important developments and potential opportunities. 

Our monthly and quarterly insights reports provide a summary of what we believe to be the most significant news points and market movements and attempt to explain them, aiming to keep you on track and informed while still allowing you to keep a focus on the long term.

In September, global equities declined for the second month in a row. US markets underperformed international and emerging markets as value outperformed growth. Energy was the only equity sector with positive performance. Negative market sentiment was driven by a sharp increase in interest rates, especially on the longer end. This also led to negative returns for fixed income.

Yields spiked over the month as markets positioned for a ‘higher for longer’ rate environment. US yields rose by over 40 basis points at the long end of the curve and yields in other developed countries rose as well. Higher rates in an environment of weaker economic growth sapped equity sentiment, especially for more rate-sensitive growth sectors.  Rising rates also drove declines for fixed income asset classes as well as gold given its sensitivity to real rates.  

Forward-looking composite purchasing manager indices (PMI) remained close to or in contraction territory across major regions. Consumer confidence generally remains low. Labor markets appear to be cooling off, with unemployment rising in major economies albeit from record lows. China showed some modest signs of improvement amid its slowdown. Overall, this paints a picture of a slowing global economy with mild recessionary dynamics in some regions being offset by modest growth in others.

US headline inflation moved higher mostly due to base effects, but core inflation continued to trend lower. A sharp increase in oil prices raised concerns about renewed inflationary pressures. In the UK and Eurozone, headline and core inflation continued to trend lower. Central Banks generally maintained their hawkish stances, which drove upward pressure on yields during the month. The Federal Reserve kept short-dated rates unchanged, but signaled the possibility of more rates hikes in the future. The Bank of England also maintained rates to evaluate the impact of recent rate hikes, while the European Central Bank hiked for the 10^th consecutive time. The Bank of Japan remained the outlier, maintaining easy monetary conditions and conducting bond purchase operations.  

In terms of geopolitics, negotiations over grain shipment routes out of Ukraine did not make progress. Fighting in the Ukraine continued, and the US added more foreign companies accused of aiding Russia to sanctions lists. Tense budget negotiations continued in the US, but a last-minute agreement averted a US government shutdown.

The US dollar appreciated sharply against most major developed and emerging market currencies, boosted by the rise in US interest rates. REITs underperformed broad equities by a wide margin due to their rate sensitive nature. Commodities were roughly flat as a sharp increase in oil prices offset weakness in other commodity sectors. 

Global markets moved higher during the quarter as slowing inflation, the pause in the Federal Reserve’s hiking cycle, an agreement on the debt ceiling and enthusiasm over artificial intelligence supported investor optimism.  Volatility remained relatively subdued throughout the quarter, despite issues in the banking sector and difficult negotiations over the debt ceiling.

Treasury yields generally rose during the quarter. Longer-term yields ended the quarter near where they started the year.  The 10-year Treasury yield rose 33 bps from 3.5% to 3.8% during Q2.

The Bloomberg Aggregate Bond Index fell 0.8% in Q2, while the MSCI ACWI index rose 6.2%. During the second quarter, a traditional 60/40 portfolio rose 3.4%. Through the first half of 2023, a 60/40 portfolio has gained 9.2%.