2Q 2022 Market Summary
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The second quarter of 2022 was uniquely challenging for all markets and asset classes. Inflation hit levels not seen in the US in over 40 years, running at 8.6% annualized through the end of June. The resulting rise in interest rates and slowdown in consumer confidence stoked fears of a recession and sent stocks and bonds sharply lower.
Inflation and other macroeconomic trends are difficult to predict consistently. Supply chain improvements may eventually alleviate high prices in some industries, but high energy prices, rising wages, and higher housing costs may keep overall inflation high.
The current environment leaves the Federal Reserve walking a fine line between combating inflation via higher interest rates, but not raising rates so much as to push the economy into a recession. The Fed aggressively raised its key Fed Funds rate during the second quarter, including a .75% hike in June (the largest monthly hike since 1994), suggesting an ongoing willingness to slow inflation.
The end of the second quarter marked one of the worst six-month starts for a year in both equities and bonds. For example, the 10.4% first-half decline for the Bloomberg US Aggregate Bond Index marks the worst six-month start to a year for the index since its inception in 1973. The S&P 500 Index also ended the quarter in bear market territory with a 20% year-to-date decline.
While market drawdowns like this can be difficult, they often set the stage for strong future returns. According to data since 1926 from Dimensional Fund Advisors (DFA), US stocks have tended to generate strong returns over one-, three-, and five-year periods following steep market declines. US stocks have averaged a 72% cumulative return over the five-year period following a 20% market decline. The rise in interest rates creates an opportunity to put cash to work in bonds and generate more income than at any time in the past several years. Similarly for equities, the S&P 500’s current forward price-to-earnings multiple of around 16.5 times earnings is much lower than the start of the year, when the index traded at over 20 times earnings. This lower valuation multiple suggests relatively attractive valuations for some high-quality companies.
Stocks struggled this quarter, with all major equity asset classes posting sizable declines. The S&P 500 Index fell 16.1% during the quarter. Neither value nor growth stocks were spared; the Russell 1000 Value Index declined 16.7% and the Russell 1000 Growth Index dropped almost 21%. All sectors within the S&P 500 declined during the quarter, with energy, utility, and consumer staple companies
down between 4% and 6%, and consumer discretionary, technology, and communication sectors down between 20% and 25% during the quarter. The Russell Mid Cap and Russell 2000 Index of small companies saw declines of 16.9% and 17.2%, respectively. In overseas markets, the MSCI EAFE Index of developed nations fell 14.5% while the MSCI Emerging Markets Index fell 11.5%.
Bond prices continued to struggle during the second quarter due to rising interest rates. For example, one-year Treasury rates increased from 1.6% to 2.8% during the quarter as these rates are closely linked to Federal Reserve actions. Longer-term 10-year Treasury rates also increased sharply during the quarter from 2.3% to just over 3%. The Bloomberg US Government/Credit 1-3 Year Index fell less than 1% during the quarter. The Bloomberg US Aggregate Bond Index (a typical benchmark for short-term bond funds) fell 4.7% during the quarter as longer-term bonds typically show more interest rate sensitivity than short-term bonds.
The Bloomberg US High Yield Corporate Bond Index fell 9.8% due to concerns over an economic slowdown, while floating rate bonds, measured by the S&P/LSTA Leveraged Loan Index, fell 4.5% during the quarter. Floating rate loans performed better than high yield bonds during the quarter because these loans are typically higher in the capital structure than bonds, secured by assets, and feature a floating rate interest payment that investors found attractive in a rising rate environment.
The Bloomberg Commodity Index fell 5.6% during the quarter. Oil prices started the quarter around $100 per barrel of West Texas Crude and reached as high as $122 before falling to end the quarter at $108. Gold prices fell 5.6% during the quarter and were about flat for the year, again showing their historical use as a relative inflation and recession haven.
The Bloomberg Commodity Index is a broadly diversified commodity price index distributed by Bloomberg Index Services Limited.
The Bloomberg US Aggregate Bond Index is a broad-based flagship benchmark that measures the invest-ment grade, US dollar-denominated, fixed-rate taxable bond market.
The Bloomberg US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.
The Bloomberg US Government/Credit 1-3 Year Index is an unmanaged index considered representative of performance of short-term US corporate bonds and US government bonds with maturities from one to three years.
The Bloomberg US High Yield Corporate Bond Index is a rules-based, market-value-weighted index engi-neered to measure publicly issued non-investment grade USD fixed-rate, taxable and corporate bonds.
The LBMA Gold Price Index is the global benchmark for unallocated gold and silver delivered in London.
The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. and Canada.
The MSCI Emerging Markets Index is an index designed to measure equity market performance in global emerging markets.
The Russell 1000 Growth Index is a broadly diversified index predominantly made up of growth stocks of large US companies.
The Russell 1000 Value Index is a broadly diversified index predominantly made up of value stocks of large US companies.
The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The index is maintained by FTSE Russell, a subsidiary of the London Stock Exchange Group.
The Russell Midcap Index is a market capitalization-weighted index comprised of 800 publicly traded U.S. companies with market caps of between $2 and $10 billion.
The Standard & Poor’s 500 Index, often abbreviated as S&P 500, is an American stock exchange market in-dex based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices.
The S&P 500 Energy comprises those companies included in the S&P 500 that are classified as members of the GICS energy sector.
The S&P/LSTA US Leveraged Loan 100 Index is designed to reflect the performance of the largest facilities in the leveraged loan market.
The West Texas Intermediate (WTI) oil, also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content.
Bloomberg Commodity Index (BCOM) is calculated on an excess return basis and reflects commodity fu-tures price movements.