The second quarter of 2022 has been challenging for investors as markets responded negatively to shifting interest rates, supply chain snarls, inflationary pressures and geopolitical challenges. The sell-off in equities and bonds has been broad and deep, at one point pushing the S&P 500 and NASDAQ down for seven straight weekly losses, the longest such stretch since the dot-com bubble burst, while the Dow Jones Industrial Average slid for eight consecutive weeks, its longest streak since the height of the Great Depression in the 1930s.
In June, the S&P 500 punctuated a 3-week losing streak by falling firmly into bear market territory (down over 20% from its all-time high on January 3rd), only to rebound the following week by +6.5% (the 2nd-best weekly return so far in 2022 and one of just two weeks that had a gain in Q2).
Return Percentage as of June 31, 2022
S&P 500 TR USD
DJ Industrial Average TR USD
NASDAQ Composite TR USD
International Developed Markets
MSCI World ex USA NR USD
Emerging Markets Equity
MSCI EM NR USD
U.S. Fixed Income
BBgBarc US Agg Bond TR USD
Global Fixed Income
BBgBarc Global Aggregate TR USD
Source: Morningstar. Past performance does not guarantee future results. All data is from sources believed to be reliable but cannot be guaranteed or warranted. Please see important disclosure regarding index performance. Please see disclosure at the end of commentary for limitations to index performance.
Despite a strong rally in late June, equity markets faced a turbulent quarter, ending down across the board.
U.S. equities posted their worst first-half performance since 1970.
International performance was also down significantly.
Emerging Market stocks continued to struggle, though slightly less than developed equities.1
Fixed income performance for the quarter across markets was firmly down.
The Bloomberg U.S. Aggregate bond index —predominantly U.S. Treasury’s, highly rated corporate bonds, and mortgage-backed securities—continued to post negative performance.
The Bloomberg Barclays US Aggregate Bond Index, or the “Agg”, finished slightly positive on quarter.
The Bloomberg Barclays Global Aggregate Index, representing bonds from both developed and emerging markets, ended down over 8% for the quarter. 2
Exposure to investment risk factors was a mixed bag for the quarter. Value and low volatility strategies outperformed, signaling the market’s continuing emphasis on defense. Growth and High Beta have been the year’s worst performers.3
News Impacting Markets
Inflation U.S. consumer inflation reached its highest level in over four decades, up 8.6% over one year, driven by surging energy prices, which have been the biggest driver of inflation globally this year. While oil and gas prices waned slightly at the end of June, they continue to place upward inflationary pressure on other goods and services.
The Fed Inflation continues to be the driving force animating the Fed, which responded with a 75 bps rate hike on June 15th, the most significant move in 30 years. Monetary conditions exert enormous influence on stock and bond markets, and market participants remain keenly aware of Fed comments and expectations of future rate increases.
Recession Factors Economic data (including market performance) and aggressive Fed activity have many market participants nervously watching for signs of a recession. The official definition is now “the period between a peak of economic activity and its subsequent trough, or lowest point,” and its determination involves an ambiguous interpretation of the “depth, diffusion, and duration” of decline in economic activity. Market participants will only be made aware of an official recession when the NBER Business Cycle Dating Committee makes an official determination. Let the navel-gazing begin.
Markets are forward-looking systems. They tend to fall in advance of economic turbulence and recessions and start climbing earlier than the economy does. Market returns have tended to be positive during periods of economic recession. Over the past century, returns on U.S. equities have been positive two years after a recession began for 12 of the 16 recorded recessions. Using history as a guide, long-term investors can take some solace in knowing that the optimal strategy has been to endure economic downturns, ignore talk of recessions, and stay focused on maintaining broad-based diversification across geographies, investment vehicles, asset classes, and risk factors.
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