Global stocks continued their decline in the second quarter of 2022 with U.S. stocks entering bear market territory in June. Decades high inflation spurred the Federal Reserve to aggressively hike rates, which elevated concerns about the possibility of a recession. Although seeing portfolios decline is painful, we think it is important to remember that both bear markets and recessions are a normal part of the economic cycle.
- The Federal Open Market Committee (FOMC) announced a 0.50% increase in the federal funds rate at its May meeting and a 0.75% increase at its June meeting, bringing the federal funds rate to a range of 1.5%-1.75%. The FOMC also released an updated summary of economic projections in its June meeting, which showed the median projection of the ending federal funds rate in 2022 at 3.4%. This is a marked increase from the median projection in March of 1.9%1. In testimony to Congress in June, Jerome Powell indicated that the FOMC is “strongly committed to bringing inflation back down, and we are moving expeditiously to do so”2.
- Inflation remained elevated during the quarter as the Consumer Price Index for All Urban Consumers (CPI) rose 1.0% in May, bringing the CPI over the last 12 months to 8.6%. This marked the largest 12-month increase since the period ending December 1981. As in prior months, gasoline, shelter and food were the biggest contributors to the CPI increase during the month.3 High inflation is a global phenomenon that has been exacerbated this year by the Russia-Ukraine conflict as both countries are large commodity exporters and the conflict is further pressuring strained supply chains.
- The U.S. labor market remained steady in the second quarter, with the May unemployment rate holding at 3.6%. The economy added 390,000 jobs in May with notable gains in leisure and hospitality, professional and business services, and transportation and warehousing industries.4
- Earnings estimates for second quarter 2022 came down, while revenue growth expectations increased. S&P 500 earnings are still expected to grow by 4.1% and revenues are expected to grow 10.1%. The consumer discretionary sector saw the sharpest revisions downward in earning estimates of 19.3%, while the energy sector experienced the greatest increase of 38.6%.5
Second quarter returns
- Global stocks continued to decline in the second quarter. On a relative performance basis, international markets held up better than U.S. stocks in the second quarter with emerging markets stocks posting the most modest declines of 11.5%.
- In U.S. markets from a style standpoint, value stocks overall held up better than growth stocks through the continued market turmoil. A rising interest rate environment is generally thought to have a greater negative impact on growth stocks because these stocks have cash flows further out into the future that are being discounted at a higher interest rate. Large cap value stocks declined 12.2%, whereas large cap growth stocks declined 20.9%, and small cap value stocks down 15.3% also outperformed small cap growth stocks -19.3% during the quarter.
- In a reversal from the first quarter, developed international and emerging markets stocks outperformed U.S. markets during the quarter. This occurred despite the U.S. dollar strengthening relative to international currencies, which weighed on returns for U.S. investors in international markets.
World asset classes
Returns for the second quarter 2022
- Yields continued to rise across the curve in the second quarter driving bond prices lower. The greatest impact of the FOMC hiking rates was to treasury bills with maturities less than two years. Twoyear treasury yields increased a more modest 0.64% over the course of the quarter while 10-year treasury yields increased 0.66%.6 Although the immediate effect of the increase in yields is negative price performance for bonds, over time higher yields should benefit long-term bond investors as reinvestment takes place in bonds with higher yields.
- Both investment-grade and below investment-grade fixed income sectors experienced negative performance in the first quarter. Municipal investment-grade bonds 0.8% outperformed taxable investment-grade bonds -4.7% this quarter.
- U.S. high-yield credit spreads widened during the second quarter and high yield bonds declined 9.5% during the quarter. Emerging markets bonds were the laggards during the quarter declining 11.4%. Within the bond market, the continued geopolitical risk of the Russian invasion appeared to have the greatest impact on emerging markets bonds.
The first half of 2022 is being cited in financial news media as the worst start to the year in the U.S. stock market since 1970. As you digest this and other financial news, we think it is essential to zoom out from the current market turmoil and take a longer-term view of how markets have performed over those five decades. The S&P 500 has earned a 10.5% annualized return since 1970. While returns were negative in some calendar years during the period, returns were positive in over 80% of calendar years. Trying to avoid the negative time periods is near impossible to do consistently.
This is why, especially during uncertain times, we advise you to maintain discipline, focus on what you can control, and invest in a well-diversified portfolio suited to your unique financial situation.
U.S. Stock Market: Russell 3000 Index
International Developed Stocks: MSCI EAFE NR Index
Emerging Markets Stocks: MSCI EM NR Index
U.S. Bond Market: Bloomberg Barclays Aggregate Index
Emerging Markets Bonds: JPM EMBI Global Diversified TR Index
Large Cap Value U.S. Stocks: Russell 1000 Value Index
Large Cap Growth U.S. Stocks: Russell 1000 Growth Index
Small Cap Value U.S. Stocks: Russell 2000 Value Index
Small Cap Growth U.S. Stocks: Russell 2000 Growth Index
Int-Term Municipal Bonds: BBgBarc Municipal 1-10Y Blend 1-12Y Index
High Yield U.S. Bonds: ICE BofA BB-B US CP HY Constrained Index
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