2022 Second Quarter Stock Market Commentary
Ethan Pollard | July 07 2022
Global equities fell further into negative territory during June to cap the worst start to a year for stocks since 1970, with inflation uncertainty and waning economic data dragging markets lower.
The S&P 500, a benchmark for large cap US stocks, fell -8% in June and is down -20% on the year which qualifies for a bear market.
Overseas equities lost -9% this month for a -18% full-year return on the MSCI ACWI ex-US index.
Within fixed income, bonds continue to struggle as yields push higher, with the ten-year Treasury nearing 3.5% after the Fed’s somewhat surprising 75 basis point rate hike that was the highest in 28 years. Though yields did settle back closer to 3% by month-end. The Barclays US Aggregate bond index lost -1.6% in June and is down -10% year-to-date, with the index never having finished lower than -3% for a year dating back to its inception in 1976.
Commodity prices pulled back -11% on the month, through the Bloomberg Commodity Index is one of the only asset classes showing a positive return for the year at +18%.
With equities on track for their most volatile year since 2009, having a data-driven plan is as important as ever. Our proprietary Three Dials asset allocation methodology was unchanged during the month of June, as we summarize below:
- Market Sentiment and Momentum: (Negative ❌)
Equities remain stuck in a bearish downtrend, with investor sentiment languishing near historic lows.
Until we see a catalyst that improves sentiment and changes the tide for stocks, our Momentum Dial will remain in a Negative position.
- Economic Fundamentals: (Positive ✔️)
Economic growth continues to slow, with Fed Chair Jerome Powell recently admitting that the Fed must accept a higher probability of a recession in order to tame inflation.
With a strong labor market as a notable bright spot, we see no recession on our doorstop, though we continue to watch for signs coming down the pike. For now, our Fundamental Dial stays Positive.
- Valuation: (Negative ❌)
Despite the price decline over the first six months of the year, valuation metrics such as price-to-sales and price-to-book ratios remain at their highest levels since the peak of the Dot-Com bubble. Our Valuation Dial continues to show a Negative reading.
Our Three Dials composite reading remains Slightly Defensive, with two dials fully “off” and one still fully “on” through the end of the second quarter. We continue to preach diversification and will communicate all future updates accordingly.
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