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Key Takeaways, Second Quarter 2022
By Ralph Goldsticker, CFA | July 2022
Stocks and bonds fell significantly over the quarter, extending Q1’s losses. After March’s rate increase (the first since 2018), the Fed raised the Fed Funds rate in May by 50 bps and in June another 75 bps. For some, this signaled the Fed is “behind the curve” and that recent high inflation will persist. For others, it triggered the fear that future rate increases may result in a hard landing/trigger a recession. Ongoing high inflation and commodity prices, the economy’s pandemic-related disruptions, and Russia’s invasion of Ukraine also weighed on markets.
However, the level of longer-maturity interest rates, break-even inflation rates from the TIPS market, and surveys of economists all suggest that the recent high inflation will be contained. Forecasts of corporate earnings held up as well, suggesting that security analysts are not forecasting a recession.
Equities
Both US and international stocks fell. The broad US market fell 16.7%, developed international 14.5% (8.3% in local currency), and emerging markets 11.4%. YTD they are down 21%, 20% (12% in local FX) and 18%.
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US growth stocks underperformed the broader market losing 21%, while value stocks fell 12%
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There was a large divergence across sectors. The more economically sensitive growth-oriented sectors such as Communications, Consumer Discretionary and Technology fell 20% to 25%, while Consumer Staples, Utilities and Energy were only down 5% to 6%.
Fixed Income
Interest rates rose, credit spreads widened, and the bond prices of all maturities and credit ratings fell.
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The yield on 10-year Treasury bonds peaked at 3.49% before finishing the quarter at 3.10%. It is up 78 bps for the quarter, 1.58% YTD, and 2.58% from its March 2020 low.
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The aggregate US bond market fell 4.7%.
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Investment Grade (IG) corporate bond spreads widened by 35 bps and High Yield by 2.44%. IG spreads are now 52 bps wider than their pre-pandemic level; High Yield spreads are 2.33% wider.
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Real interest rates are back in positive territory: 0.43% for 5-year TIPS, and 0.65% for 10-year.