Q3 2022 – Annandale Capital Quarterly Commentary

The subject of this commentary is like the last, but the market backdrop is worse. Since our last letter, global equities have fallen an additional 6.7% and US investment-grade bonds 4.8%. That puts equity and bond returns at -25.3% and -14.6% respectively (through 9/30/22). Equity losses of this scale are infrequent, but to be expected. The real issue and source of wealth destruction stems from the bond market, which at $126.7 trillion in value is larger than the global market for stocks. Bond losses are rare. Per Jason Zweig of the Wall Street Journal, “the US bond market has had positive returns, before inflation, in all but four years since 1976. Even in 1994, when the Federal Reserve raised interest rates six times for a total of 2.5 percentage points, bonds lost only 3% in aggregate.” To our knowledge, this is the worst market for US bonds (and global bonds) in recorded history. The good news is one culprit is known. A large portion of the weakness in financial markets can be attributed to stubbornly high inflation. Unfortunately, forecasting inflation is exceedingly difficult. Download Q3 2022 Commentary