In this episode of KayneCast, Julie Kutasov, Portfolio Manager of the KAR Small-Mid Cap Core Strategy, joins Managing Director Jordan Greenhouse to discuss how high levels of volatility and inflationary pressures impacted the Q3 2022 stock market outlook.

Hawkish Fed Rattles Small-Mid Cap Performance

Kutasov begins her Q3 Small-Mid Cap review with an overview of the Federal Reserve’s mid-September interest rate hike. Combined with Chairman Powell’s comments suggesting a longer-than-anticipated period of economic tightening, the interest rate hike left investors concerned that, with the economy showing signs of weakness, the Fed’s ability to rein in inflation would be limited.

Slowing economic growth “usually leads investors to focus on quality: solid balance sheets, earnings stability, strong returns on capital, and sustainable secular growth.” Kutasov reports this “flight to quality” occurred as expected and was reflected in the Russell 2500 benchmark’s Q3 performance.

Inflationary dynamics drove the outperformance of commodity plays in Q3 2022. Energy companies performed well: up over six percent for the quarter and almost 33 percent year-to-date.

Small-Mid Cap Stocks See Continued Pressure from Geopolitics

COVID-19 continues to prove a resilient and unpredictable factor, as evidenced by the continued emergence of new variants and the recent case resurgence in China.

The ongoing war in Ukraine also concerns investors, especially given its impact on European energy reserves. Kutasov notes that for “strategies with minimal exposure to Russia and Ukraine…the crisis should continue to have little direct impact.  Secondary effects could be quite meaningful, however.”

Finally, inflation continues to drive up gas and food prices, putting pressure on consumer spending and keeping investors on edge. Kutasov reiterates that economic slowdowns, in her experience, tend to drive investors to higher quality companies. Kutasov believes KAR’s strategy of investing in high quality names while avoiding capital intensity and direct commodity exposure is well-suited for the current economic market. As she notes, “every crisis also presents an opportunity,” and one of KAR’s objectives is seeking better-protected businesses in segments under pressure — a strategy that she believes can be leveraged during times of economic uncertainty.

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