News & Insights

  • Second Quarter 2022 Commentary

    7/11/2022

    2022 Second Quarter Recap

    As we enter the second half of 2022, we continue to grapple with the challenges surrounding inflationary pressures, a trajectory of higher interest rates set in motion by the Fed, and the growing volume of those in the financial media calling for a recession here in the U.S. The uncertainty of how each of these factors will play out was evident during the second quarter as market volatility remained elevated throughout. The S&P 500 finished the period down -17.41% which was only the 9th quarter since World War II in which markets dropped more than 15%. Even energy, which has been the lone bright spot thus far (up 31.42% YTD) is technically in a bear market as the sector is down over 20% from their June 8th highs.

    While the sell-off has been broad effecting almost all asset classes and investment styles, we continue to see relative outperformance from large-cap value stocks. There are several reasons for this, 1) large-cap companies tend to perform well in recessionary environments as they have stronger brands and more stable businesses, 2) small-cap stocks are typically more reliant on debt financing to sustain operations and hence more sensitive to rising borrowing costs. Additionally, value tends to outperform growth in high interest rate/recessionary environments.

    On a sector level, all 11 S&P 500 sectors finished the second quarter with negative returns. Relative outperformers included traditionally defensive sectors such as utilities, consumer staples, and healthcare, which are historically less sensitive to a potential economic slowdown, and the quarterly losses for these sectors were modest. Energy was also a relative outperformer thanks to high oil and gas prices for much of the second quarter, although a late-June drop in energy commodities caused the energy sector to finish the quarter with a small loss.

    Sector laggards in the second quarter were similar to those in the first quarter, with communication services, tech, and consumer discretionary sectors seeing material declines due to the aforementioned, broad rotation away from the more highly valued corners of the market. Specifically, internet stocks again weighed on the communications sector, while traditional retail stocks were a drag on the consumer discretionary sector following unexpectedly bad earnings from several major national retail chains. Financials also lagged in the second quarter thanks to the rising rhetoric of a future recession combined with a flattening yield curve, which can compress bank profit margins.

    US Equity Indexes - Q2 Return and YTD Return Chart

    Globally, owning assets outside of the U.S. provided little solace as the Russia-Ukraine war continued with no signs of a ceasefire in sight. However, there was slight relative outperformance as foreign central banks are expected to be less aggressive with future rate increases compared to the Fed. Emerging markets outperformed foreign developed markets thanks to high commodity prices despite rising global recession expectations.

    International Equity Indexes - Q2 Return and YTD Return Chart

    Switching to fixed-income markets, most sectors of the bond market remained under pressure as investors dealt with the effects of the 75bps rate hike in June. Not only was this the largest single rate increase we’ve seen since 1994 but Chairman Powell set expectations for another 75bps rate hike in July in the Fed’s effort to aggressively tame inflation.

    US Bond Indexes - Q2 Return and YTD Return Chart

    Third Quarter Market Outlook

    The S&P 500 posted its worst first-half performance since 1970. It seems the last few years have been a study in extremes. We experienced market performance well above historical norms in the period following the lows seen in March 2020 and the first half of this year has shown us the other side of it. Tremendous growth is often met with a period of retreat and digestion. As the old saying goes, trees don’t grow to the sky, but they also don’t sink to the sea.

    The volatility and market declines of the first six months of 2022 have been unsettling, however, the prospects for future positive returns look very compelling. It is our view that many negativities, including a potential recession, have been priced into the market, opening the possibility of positive surprises as we move forward in 2022.

    With regards to inflation and additional interest rate hikes by the Fed, the markets have already priced in stubbornly high inflation and numerous additional rate hikes from the Federal Reserve between now
    and early 2023. If we see a definitive peak in inflationary pressures in the coming months (as some recent evidence suggests), then it’s likely the Federal Reserve will hike rates less than currently feared, and that could be a materially positive catalyst for markets.

    Global economic growth remains tempered in the face of China essentially shutting down their economy due to Covid concerns during the quarter. As Chinese manufacturing and shipping comes back on line, we expect that concerns about a global recession will ease and that additional supply chain capacity will alleviate inflationary pressures.

    Finally, regarding geopolitics, the human tragedy in Ukraine continues, but the conflict has not expanded beyond Ukraine’s borders, and many analysts believe that some sort of conflict resolution can be reached in the coming months. Any sort of a truce between Russia and Ukraine will likely reduce commodity prices and global recession fears should decline as a result.

    The last point we will touch in this note is that of a recession. We have always said that investing through a recession is always a matter of when and not if. Recession’s will always be part of the business cycle as the economy ebbs and flows. We continue to believe that an economic recession is unlikely this year as both consumer and corporate balance sheets remain in solid shape. However, we typically will not know when a recession occurs until after we have gone through it. Typically, equity markets bottom before recessions and markets start to rise by the time a recession is occurring. The chart below reflects this point and provides yet another rationale for remaining invested through these various cycles.

    The opportunity cost of waiting for economic recovery before investing

    We understand the risks facing both the markets and the economy, and we are committed to helping you effectively We recognize that investing during bear markets is difficult and at times can be downright painful. However the decisions investors make during this period can have a long lasting impact on their portfolios. Resisting the temptation to deviate from your long term investment plan in response to short-term market swings or economic uncertainty has never been more important.

    Please do not hesitate to contact us with any questions, or comments, or to schedule a portfolio review.


     

    The Information contained in this document is based on data received from third parties which we believe to be reliable and accurate. YorkBridge Wealth Partners, LLC has not independently verified the information and does not otherwise give any warranty as to the truth, accuracy, or completeness of such third party data, and it should not be relied upon as such. Any opinions expressed herein are our current opinions only.  YorkBridge Wealth Partners, LLC is an SEC Registered Investment Adviser under the Investment Advisers Act of 1940 (“Advisers Act”).  Registration of an investment advisor does not imply any specific level of skill or training. The information contained in this document is to assist with general planning. Please consult with your own tax advisor and attorney for more specific information.

    

Skip to content