Join Jordan Greenhouse, Managing Director with Kayne Anderson Rudnick, as he discusses the Q3 Small Cap Quality Value stock market performance review with Julie Kutasov, Portfolio Manager of the KAR Small Cap Quality Value portfolio. The two examine the key drivers that made Q3 2022 so volatile and provide a stock market outlook for the remainder of the year.

Recession Fears in Q3 2022 Keep the Small Cap Value Market on Edge

Inflationary pressures spilled over from Q2 into the Q3 stock market outlook, intensifying in mid-September when the Federal Reserve increased interest rates. Comments from Chairman Powell suggesting a longer period of economic tightening, coupled with more aggressive action from the Feds reinforced investor fears of a coming recession.

Kutasov notes that the markets responded as they’ve done historically when faced with slowing economic growth with a renewed focus on quality companies with solid balance sheets, earnings stability, strong returns on capital, and sustainable secular growth. However, inflationary pressures continued to drive outperformance in the commodity sector, with energy companies up nearly 8 percent for Q3 and 37 percent for the year to date.

Geopolitics and Inflationary Concerns Expected to Continue into Q4 2022

Concerning the outlook for the Small Cap Value portfolio for Q4 2022, Kutasov notes the main issues will continue to be the war in Ukraine, inflation, and the unpredictability of emerging COVID-19 variants. A resurgence of COVID in China has the potential to disrupt supply chains, while western sanctions and limited access to Russian energy may have severe impacts on Europe this winter.

Regarding inflation, Kutasov notes that, while “some easing on the inflationary front is to be expected, inflation is still running at its fastest pace in years driving up gas and food prices, putting pressure on consumer spending, the key driver of the U.S. economy, and on businesses with companies unable to offset dramatic input cost increases with higher prices.” She believes KAR’s strategy of focusing on higher-quality companies will help the Small Cap Quality Value portfolio ride out this uncertain time by avoiding capital intensity and direct commodity exposure.

Listen to the podcast above to learn more about Small Cap Quality Value performance in Q3 2022 and join us in Q4 for another stock market performance review.