Economic Update 2022
2nd Quarter Economic Update
Record high inflation, rising interest rates, and recession fears led stocks and bonds lower in the second quarter of 2022 (2Q22). For just the second time in 40 years, bonds and stocks both posted losses for two consecutive quarters. US equities ended the quarter at -16.1% and entered an official bear market (defined as a drop of 20% from last peak). Despite the pain from the first half of 2022, US equities are still up an average of 8.4% per year over the last three years.
Within US equities, all 11 sectors suffered losses in 2Q22. Amid recession fears, Consumer Staples and Utilities, often considered defensive sectors, suffered the least at -4.6% and -5.1% respectively. On the other hand, growth-oriented technology-related sectors like Communication Services and Consumer Discretionary, were the worst performers at -20.7% and -26.2% respectively. Energy is the only sector with positive returns of 31.8% for the year despite losses of 5.2% in the quarter.
Rising interest rates continued to hurt growth stocks. Growth stocks are often synonymous with the high-flying companies in the markets like technology while value stocks are often considered undervalued, steady, and sometimes even boring. The gap in performance between value and growth stocks across size and style was stark and was significantly in favor of larger and value oriented segments as investors have sought safety amid looming uncertainties. Large cap value stocks outperformed large cap growth by 8.7% for the quarter and over 15% for the year.
International equities fared better than US equities in 2Q22 despite the ongoing war in Ukraine and China’s economic toll from zero COVID policy. Developed international and emerging markets ended 2Q22 at -14.3 % and -11.3% respectively. A strong dollar also had a significant impact. Generally speaking, a stronger dollar translates to lower returns for international investments. This can be seen in its local currency returns for developed international, emerging markets which ended 2Q22 at -7.6% and -8.0% respectively.
Bonds extend their losses in 2Q22. US bonds fell 4.7% in the quarter led by the Fed’s aggressive interest rate increases. After raising the rate by 0.25% in March, the Fed amped up its effort with a 0.5% increase to the funds rate in May followed by a 0.75% increase in June. Despite higher inflation, TIPS also fell 6.1% due to rising rates. Longer-term Treasuries, which have the greatest sensitivity to interest-rate changes, were the hardest hit and fell 11.9%. US high yield bonds fell 9.8% due to the flight to quality stemming from recession fears. Lastly, a stronger dollar and inflation woes also led international bonds lower for the quarter.
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Timothy G. Redmond, CFP®, AIF® MSFS
CA Insurance License: 0687279
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The MSCI ACWI (All Country World Index) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets.
The Bloomberg Barclays Global Aggregate Index is a measure of global 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.
The Standard & Poor's 500 Index - S&P 500 is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies by market value. The S&P 500 is a market value or market-capitalization-weighted index. The MSCI ACWI Ex-U.S. is a market-capitalization-weighted index maintained by Morgan Stanley Capital International (MSCI). It is designed to provide a broad measure of stock performance throughout the world, with the exception of U.S.-based companies. The MSCI All Country World Index Ex-U.S. includes both developed and emerging markets.