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A Painful Bear Market Begins

By Megan Horneman. © Verdence Capital Advisors

Key Takeaways:

  • Inflation stubbornly high.
  • Consumer sentiment at record low.
  • Equity growth trade suffers further.
  • Bonds suffering from inflation and aggressive Fed.
  • Commodities sharply lower on growth concerns.

Global bond and equity markets plummeted in 2Q22 as the Federal Reserve embarked on one of the most aggressive monetary policy regimes in decades.  Global equity markets dropped into bear market territory for the first time since the pandemic. Below we break down 2Q22 performance from an economic and asset class perspective.

  • U.S. GDP contracts more than expected in 1Q22: The final reading on U.S. GDP growth indicated that the economy contracted more than initially estimated (-1.6% vs. -1.4%) on weaker consumer spending.
  • Inflation still stubborn: Inflation as measured by the CPI Index rose at the fastest annual pace since 1981. However, core prices as measured by the PCE Core Index are showing signs of moderating.
  • Manufacturing slowing: The ISM Manufacturing Index, while still in expansion territory, fell to the lowest level since June 2020.
  • Consumer sentiment at record low: The University of Michigan Consumer Sentiment Index fell to a record low in June as inflation continues to strain households.

Global equities fell for the second quarter as economic growth is markedly slowing and global central banks are pulling back easy monetary policy.

  • U.S. growth trade falls further: All major U.S. markets fell in 2Q22, but it was led by growth at the large, small, and midcap level. The Russell 3000 Growth Index underperformed its value counterpart by 430 bps.
  • EM falls the least: Emerging markets dropped sharply but outperformed their developed market counterparts.

Fixed Income – Pain continues: The Bloomberg Aggregate Index fell for the second consecutive quarter as inflation remains historically high and the Fed is aggressively raising interest rates.

  • Short term cushions losses: While all negative, short-term Treasuries (2YR), floating rate and leverage loans all fell the least in 2Q22 while the 3mo T-Bill posted a modest gain.
  • Credit struggles: Both investment grade and high yield credit declined as risk appetite deteriorated. However, high yield led the weakness, posting its worst quarterly decline since 1Q20. The extra yield investors demand to own high yield rose to the highest level since July 2020.

Commodities – Sharp Losses: The Bloomberg Commodity Index posted its worst quarterly performance since the covid induced selloff in 1Q20 and is now deeply in correction territory (a loss of 10%+). While the energy sector was the only sector to post a gain for the quarter, select energy commodities fell deeply into bear market territory.

  • Metals under pressure on growth concerns: Copper prices, a leading economic indicator due to its widespread applications across industries, posted its worst quarterly performance since 3Q21.
  • Lumber plummets on housing market weakness: Lumber prices are down 52% since their March high as the outlook for real estate is clouded by higher interest rates and higher housing prices.

Disclaimer:

This material was prepared by Verdence Capital Advisors, LLC (“VCA”). VCA believes the information and data in this document were obtained from sources considered reliable and correct and cannot guarantee either their accuracy or completeness. VCA has not independently verified third-party sourced information and data. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice. This material is being provided for informational purposes only and is not intended to provide, and should not be relied upon for, investment, accounting, legal, or tax advice. 

Past performance is not a guarantee of future results.

Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly in these materials will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. You should not assume that any discussion or information contained in this report serves as the receipt of, or as a substitute for, personalized investment advice from VCA. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. All indexes are unmanaged, and you cannot invest directly in an index. Index returns do not include fees or expenses.