Q3 2022 Investors continued to face a volatile environment in the third quarter as sentiment was impacted by stubbornly high inflation and tightening financial conditions. Markets rallied early in the quarter amid optimism for peaking inflation and a hopeful slowing of U.S. Federal Reserve (“Fed”) interest rate hikes. However, an unrelenting string of higher-than-expected inflation readings and hot labor market invited a “higher for longer” hawkish message from the Fed which rattled markets. The S&P 500® Index fell sharply through the end of the summer, dragging the Index to new lows for the year. Bonds also remained under significant pressure amid rising rates as the Bloomberg U.S. Aggregate Index, a broad gauge of bond market performance, has fallen more than -19% this year. Those searching for signs of easing inflation found very little to get excited about. While the Consumer Price Index (CPI) declined from 9.00% to 8.25% and U.S. energy and commodities prices are down from their peaks, other inflation alarms continued to sound. Core CPI (excluding food and energy) increased from 5.91% to 6.32% in August. The Personal Consumption Expenditures Price Index(PCE), the Fed’s preferred inflation gauge, registered 6.2% in August. The unemployment rate also fell to 3.5% and the economy added over 1 million new jobs during the quarter, although the pace of job gains has slowed slightly. In response, Fed Chair Jerome Powell delivered a very direct message at the annual Jackson Hole, Wyoming policy meeting which pushed back hopes of any near-term policy easing. In his eight-minute speech he said, “We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done.” With persistent high inflation, the Fed has become increasingly concerned that expectations for future inflation will become entrenched, necessitating strong policy action now. Following the speech, expectations for an interest rate hike jumped from 0.50% to 0.75%, which was the result in September. The target range for the federal funds rate rose to 3.00-3.25% at the end of the quarter with Fed officials signaling further increases to a “terminal rate” of 4.6% in 2023. Economic momentum slowed in the third quarter. After registering a 1.6% annual decline in the first quarter, U.S. GDP contracted again for the second straight quarter, with a reading of -0.60% according to the Bureau of Economic Analysis. The manufacturing sector exhibited weakness with a reading of 50.9 for the ISM Manufacturing Indexes—barely above the 50 mark which indicates expansion. The ISM Non-Manufacturing was a little more resilient as it ticked up slightly to 56.7 during the quarter. Consumer confidence also showed some modest improvement during the quarter. On the other hand, the housing sector has been hard hit by sharply declining home sales as affordability has been impacted by mortgage rates approaching 7%. Stocks Most segments of global equity markets were negative during the third quarter. The S&P 500® fell -4.88% amid ongoing volatility that saw an 18% rally erased by renewed selling pressure through late August and September. Only two of eleven sectors were positive, with consumer discretionary gaining 4.36% and energy rising 2.35%. The communication services and real estate sectors underperformed with returns of -12.72% and -11.03%, respectively. Value stocks underperformed Growth stocks with a –5.62% return for the Russell 1000® Value Index compared to the -3.60% return for the Russell 1000® Growth Index. On a year-to-date basis, Value remains ahead of Growth by more than 12%. Small caps outperformed but were still negative with a -2.19% return for the Russell 2000® Index during the third quarter. International equities continued to be impacted by the rapidly strengthening U.S. dollar, which sapped approximately 6% from USD-based international returns. Foreign developed markets returned -9.36% for the MSCI EAFE Index. Singapore, Israel and Ireland outperformed within the Index, while Hong Kong, Norway, and Austria underperformed. The MSCI Emerging Markets Index fell -11.57% as a -22% decline in China was a top detractor. Czech Republic and Poland also underperformed, while Turkey, Brazil, and Indonesia were relative outperformers. Bonds Rising interest rates led to another quarter of steep losses in the bond market with the Bloomberg U.S. Aggregate Index posting a -4.75% return for the quarter. The 10 Year U.S. Treasury yield climbed nearly 100bps to 3.93% at the end of the quarter—the highest point in over a decade. Amid this backdrop, investment grade corporates underperformed with the Bloomberg U.S. Corporate Bond Index falling -5.06% during the quarter. Non-investment grade “junk” bonds outperformed due in part to their shorter duration and modestly tighter credit spreads. The Bloomberg Corporate High Yield Index returned -0.65%. Agency mortgage-backed securities (MBS) underperformed as the Bloomberg U.S. MBS Index declined -5.35% with the Fed continuing with its balance sheet reduction program. Municipal bonds also faced selling pressure and the Bloomberg Municipal Bond Index posted a -3.46% return for the quarter. Lastly, foreign bonds were hurt by rising rates and a stronger dollar as the Bloomberg Global Aggregate ex U.S. Index declined -8.85%. Each of us at AMG Funds appreciates the continued opportunity to assist you with your investing needs. All investments are subject to risk including possible loss of principal. Past performance is no guarantee of future results. Please note that all performance data and comments are for the period from July 1, 2022 through September 30, 2022. Any sectors, industries, or securities discussed should not be perceived as investment recommendations. The views expressed represent the opinions of AMG Funds and are not intended as a forecast or guarantee of future results. The information and opinions contained herein are current as of September 30, 2022 and are subject to change without notice. Information has been obtained from sources believed to be reliable, but its accuracy, completeness, and interpretation are not guaranteed. The Russell 1000® Index measures the performance of approximately 1,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000® represents approximately 92% of the U.S. market. The Russell 1000® Value Index is a large-cap value index measuring the performance of the largest 1,000 U.S. incorporated companies with lower price-to-book ratios and lower forecasted growth values. The Russell 1000® Growth Index is a market capitalization weighted index that measures the performance of those Russell 1000® companies with higher price-to-book ratios and higher forecasted growth values. The Russell 2000® Index is composed of the 2000 smallest stocks in the Russell 3000® Index and is widely regarded in the industry as the premier measure of small-cap stock performance. The Russell 2000® Value Index is an unmanaged, market-value weighted, value-oriented index comprised of small stocks that have relatively low price-to-book ratios and lower forecasted growth values. The Russell 2000® Growth Index measures the performance of the Russell 2000® companies with higher price-to-book ratios and higher forecasted growth values. The Russell Midcap® Index measures the performance of the 800 smallest companies in the Russell 1000® Index, which represent approximately 25% of the total market capitalization of the Russell 1000® Index. The S&P 500 Index is a capitalization-weighted index of 500 stocks. The S&P 500 Index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. U.S. Long Government Bond Index tracks the market for U.S. dollar denominated, fixed-rate, nominal U.S. Treasuries and U.S. agency debentures. The MSCI World ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries excluding the United States. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. Please go to msci.com for most current list of countries represented by the index. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI China Index captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). Please go to msci.com for the most current list of countries represented by the MSCI indices. The Bloomberg Global Aggregate ex USD Index is a measure of investment grade debt from 24 local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. Bonds issued in USD are excluded. The Bloomberg U.S. Corporate High Yield Bond Index is a total return performance benchmark for USD-denominated, high yield, fixed-rate corporate bonds having a maximum quality rating of Ba1/BB+/BB+ or below, as determined by the middle of the Moody’s, Fitch, and S&P ratings. The Bloomberg U.S. Municipal Index covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and prerefunded bonds. The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment grade fixed-rate bond market, including both government and corporate bonds. The Bloomberg U.S. Corporate Bond Index is an unmanaged index representative of publicly issued, SEC-registered U.S. corporate and specified foreign debentures and secured notes. Bloomberg®” and any Bloomberg index described herein are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the index (collectively, “Bloomberg”) and have been licensed for use for certain purposes by AMG Funds LLC. Bloomberg is not affiliated with AMG Funds LLC, and Bloomberg does not approve, endorse, review, or recommend the fund described herein. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to such fund. The Indices are unmanaged, are not available for investment and do not incur expenses. Investment advisory services are offered by AMG Funds LLC. AMG Distributors, Inc., member FINRA/SIPC.