They Had Us In The First Half

By Ben Norris, CFA, Securities Research Analyst, Associate Vice President

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We’re nearly halfway through 2022 and markets are off to an historically bad start to the year with both equity and bond markets showing double digit losses in most cases. This is set to be the 5th worst start to the year of all time for U.S. equity markets. Similarly, the Barclays US Aggregate Bond Index is down more than 10% over the trailing year, serving as a reminder that rising interest rates (especially coming off of near zero percent yields) can hammer bond markets. This has been worst ever trailing one-year performance for the Barclays Agg by a factor of 3-4x. This isn’t unique to the U.S. either, the rest of the world has been under pressure as well. The MSCI World Index is down more than 18% for the year and certain geographies, such as Eastern Europe, have fared much worse. The only areas of reprieve for investors have been commodities and energy markets which are not just the only major asset class in positive territory over the last year but have seen truly outstanding performance. The Bloomberg Commodity Index is up nearly 32% over the trailing year while crude oil is up roughly 50% over the same time frame. Accordingly, stocks in the Energy sector have generally outperformed the rest of the market by a wide margin.

Many investors probably expected a bit of a slowdown in markets in 2022. There are a variety of factors to point to – soaring inflation (notably energy prices), a Federal Reserve tightening cycle, the Russian invasion of Ukraine, ongoing supply chain issues, etc. However, just how volatile (and frankly weird) markets have been in 2022 has been a bit of a surprise. Last week offered a bit of respite from the latest market turbulence with the major stock indices all up more than 5% as interest rates retreated from recent highs. The yield on 10-year U.S. Treasuries fell from 3.50% two weeks ago to below 3.10% at the tail end of last week – stock volatility has paled in comparison to interest rate volatility in 2022. A lot of ink has been dedicated to just how far the Federal Reserve will have to go in their latest rate hiking campaign so I won’t add much here other than to say that recent economic data has begun weakening to the extent that some are wondering how much more work the Fed will have to do before the economy has sufficiently cooled to tame inflation.

Markets were closed on Monday in observation of the Juneteenth holiday. Tuesday saw some interesting action in equity markets as stocks broadly rallied but were led by both growth stocks and Energy stocks, a fairly nontypical pairing of outperformers. This was likely due to two factors – First, markets were very oversold following the sharp selloff during the prior week where investors wanted to avoid holding equities going into a long weekend, so some buying was at least somewhat expected. Second, Crude Oil prices rallied sharply on Tuesday, after a brutal selloff in the two weeks prior where prices fell from more than $120 per barrel to near $100. Wednesday saw a reversal as stocks and energy markets moved lower. Also on Wednesday, Federal Reserve Chairman Jerome Powell, appeared before the Senate Banking Committee, and indicated that he and the Fed are fully committed to getting inflation under control, even if that means tipping the economy into a recession. Markets sold off into the close as result.

Thursday saw markets return to positive territory mostly led by defensive stocks (Consumer Staples, Health Care, Utilities.) as the possibility of a recession came into focus. Technology stocks also moved higher as yields retreated. Initial and continuing jobless claims numbers were released on Thursday and indicate that the U.S. labor market may be cooling but is still very strong relative to history. Continuing jobless claims, a measure on longer term unemployment, are at their lowest levels in more than 50 years. Stocks finished sharply higher on Friday to round out a week of impressive performance with the S&P 500 (SPX) gaining 6.5% and the Dow Jones Industrial Average (DJIA) up 5.4%. Markets are now expecting fewer rate hikes will be needed to get inflation under control and Friday’s rally was clearly tied to that sentiment.

It remains difficult to predict how markets will fare over the coming months as the Fed works to bring inflation under control and supply chains get untangled, but it remains clear that the path forward will likely keep investors on their toes. This week’s slate of economic data will feature updates on consumer sentiment, a revision to Gross Domestic Product numbers, and a variety of speakers from the Federal Reserve.

 

Date Report Previous Consensus
Monday 6/27/2022 Durable Goods Orders 0.4% 0.2%
Tuesday 6/28/2022 S&P Case-Shiller U.S. Home Price Index (y/y) 20.6%
Consumer Confidence Index (June) 106.4 100.0
Wednesday 6/29/2022 Gross Domestic Product (GDP) Q1 Revision -1.5% -1.5%
Thursday 6/30/2022 PCE Inflation (May, y/y) 6.3%
Core PCE Inflation (May, y/y) 4.9% 4.8%
Real Consumer Spending 0.7%
Initial Jobless Claims (June 11) 229,000 230,000
Continuing Jobless Claims (June 4) 1.32M
Friday 7/1/2022 ISM Manufacturing Index (June) 56.1% 54.3%
Construction Spending (May) 0.2% 0.3%

 

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