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The rapid reversal in risk appetite in Q3 has produced a retest of the June lows
August witnessed a significant reversal in risk appetite mid-month in response to a succession of hawkish Fed guidance. This brought an end to the +18.6% two-month rally (and optimism) that started on June 16 and peaked on August 16. Since the mid-August peak, the FT Wilshire declined -16.7% over the remainder of the quarter to produce a -4.4% return for the three-month period. The strength of the rotation to risk aversion has now driven the index below the low point reached in mid-June.
Exhibit 1: A rapid reversal in returns over the last six weeks of Q3
Exhibit 2 puts the scale of the drawdown in US equities over the latter half of Q3 into perspective - showing that it is almost a three standard deviation event. Outside of the GFC and COVID sell offs, this is one of the largest six-week drawdowns since 2006.
Exhibit 2: Putting the six-week drawdown into perspective
The YTD drawdown of -24.9% as of Sept. 30 is now the sixth largest witnessed over the last 40 years as shown in exhibit 3.
Exhibit 3: Putting the YTD drawdown into perspective
Index no. 15738341
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