Skip to main content

Inflation, Rising Rates, Slowing Growth

Market vitals

  • Global markets retreated in August (down -3.7%)
  • All sectors, except energy, declined during the month
  • Global central banks stand firm on fighting inflation despite growth concerns

Market Summary

Global stocks declined in August, bringing year-to-date losses to around -17%, as rising inflation, softer economic growth, the war in Ukraine and ongoing post-pandemic challenges continue to weigh on investors’ minds.

Europe saw the biggest declines in August with stocks in major markets such as the UK, France, Switzerland and Germany experiencing losses in the -5% to -6% range. Stocks in the US held up slightly better than those in Europe with declines nearing -4%. Returns in major Asia Pacific countries and emerging markets were mixed. Brazilian equities advanced more than 6% in August, while stocks in Mexico fell -5%. Stocks in India and China advanced 4% and 0.2%, respectively. Japanese equities pulled back -2%, and stocks in Taiwan and Australia declined -1%.

Exhibit 1 — August and YTD Total Returns for Major Markets (USD) (%)

Exhibit 1

Source: FactSet, as of 31 Aug 2022.

Most sectors declined during the month, except for the energy sector, which posted a small gain. Health care, industrials and technology stocks were among the worst performers as investors weighed the fact that the US Federal Reserve and other global central banks signal that rates will continue to go up to fight inflation, even in the face of softening economic growth.

Exhibit 2 — August Sector Performance, MSCI ACWI ex USA Index (USD) (%)

Exhibit 1

Source: FactSet, as of 31 Aug 2022.


The euro hit a new 20-year low against the dollar (Exhibit 3) after Russia shut down a major pipeline into Europe, further deepening the energy crisis that the region has been dealing with since the start of Putin’s war in Ukraine back in February. In early September, the European Central Bank (ECB) announced a 75-basis point (bps) increase in its key interest rate, the largest increase since the turn of the century, bringing its key rate to 0.75% from zero. This is on the heels of a 50 bps increase in July, as the ECB acts aggressively to curtail inflation.

Exhibit 3 — Euro per US Dollar

Exhibit 1

Source: FactSet.

United Kingdom

UK gross domestic product (GDP) fell -0.1% in the second quarter. As the cost of living increases due to rising food and energy prices, consumers are cutting back on discretionary spending. The Bank of England (BOE) indicated that the UK economy would face recession towards the latter part of 2022, which could last until the start of 2024. The BOE also expects inflation to hit 13% in the fourth quarter and raised interest rates by 50 bps in August — its largest increase in 25 years. The current economic situation will be a key focus for recently appointed Prime Minister Liz Truss, who replaced Boris Johnson on 6 September 2022.


The Japanese economy is seemingly on solid footing as GDP expanded 0.5% in the second quarter. While inflation remains a concern, with rising energy and food prices, consumer spending was strong in the second quarter and is expected to be resilient in the third quarter as Japanese consumers enjoyed their first summer without extensive COVID lockdowns.


Economic activity slowed broadly in July as strict lockdown policies, though eased, hampered consumer spending and business investments. In mid-August, the People’s Bank of China cut two key interest rates and injected fiscal stimulus into the financial system to boost lending and economic growth.

United States

At the Jackson Hole meeting in August, Federal Reserve Chair Jerome Powell reaffirmed the Fed’s commitment to battling inflation. While referencing the more recent drop in inflation (from 9.1% in June to a still white-hot 8.5% in July), Powell clearly stated that, while welcome, the drop was not enough to waylay the Fed’s plans for rate hikes. For more details, read our monthly fixed income commentary.

MSCI ACWI ex USA Index measures the performance of large- and mid-cap stocks in developed (excluding the US) and emerging markets. The index is unmanaged, market capitalization weighted, includes net reinvested dividends, does not reflect fees or expenses and is not available for direct investment. See for a full copy of the disclaimer.

The views expressed are those of Diamond Hill as of September 2022 and are subject to change without notice. These opinions are not intended to be a forecast of future events, a guarantee of future results or investment advice. Investing involves risk, including the possible loss of principal. Past performance is not a guarantee of future results.

Back to top