Top of Mind: 5 Charts for Investors
June 20, 2022. Mark Barry, CFA:
The first half of 2022 has proved challenging for investors, as a combination of appreciable headwinds has weighed on financial markets and pressured asset prices. These headwinds – inflation, rising interest rates, the potential for an economic slowdown, supply chain pressures, and geopolitical tensions, among others – remain elevated and persistent. Over the last few weeks we have seen an acceleration in headlines that only complicate the already uncertain outlook.
Given the uptick in volatility in recent days and the accompanying investor anxiety, we did want to reach out with some commentary. The intent of this update is to provide some brief and easily digestible perspective for investors in thinking about the current market environment, communicated through five charts. A more comprehensive and detailed review of the markets and economy will be furnished in our quarterly market update at the end of the month.
Chart #1: Diversification Hasn’t Worked in 2022
This year we have seen all traditional asset classes deliver strongly negative returns. Bonds have not served to diversify equity risk, and the performance of an aggressive stock/bond portfolio (80/20) has not been much different than that of a conservative one (20/80). Additionally, diversification within asset classes has only provided marginal benefits.
Chart #2: Perspective for Long-Term Equity Investors
As of yesterday’s close, the S&P 500 has declined 20%+ from its highs. While we understand this drawdown is painful given its magnitude, it is worth remembering that at current levels US equities are still well above pandemic lows.
Chart(s) #3: Bond Markets Disappoint, But There Is a Silver Lining
The bond markets are having a historically difficult year, with the Bloomberg Aggregate down 12.1%. However, there is a silver lining in the bond math; as nominal yields increase investors are able to reinvest cash from maturities and coupon payments at higher rates and lock in more attractive income streams. This will be a welcome change for retirees and other savers, as low market yields in recent years were often insufficient to support their income needs.
Chart(s) #4: High Cash Positions = Potential Support for Asset Prices
Large amounts of cash remain on the sidelines, with trillions of dollars held in money markets. Eventually these funds will have to be deployed by investors. In recent months investor positioning has become even more conservative, per the BofAML Fund Manager Survey. The redeployment of this cash by investors would be supportive for asset prices.
Chart #5: S&P 500 Index – Looking Under the Hood
Inflation and rising yields have been two significant factors at play in the current market environment, and their impact on stocks is somewhat specific to the business or industry a given company operates in. In 2022, long-duration growth stocks have been punished as interest rates moved higher, with young, unprofitable companies being especially hard hit. On the other hand, sectors that have historically been inflation beneficiaries (Energy, Materials) are relative outperformers. This has seen their weight as a percentage of the S&P 500 begin to increase after a long period of decline; pro-inflation sectors appear to be making a comeback, at least for now.
Conclusion
As noted earlier, several significant headwinds for the financial markets remain unresolved. Until investors believe they have some clarity on the direction and range of likely outcomes (inflation, pace of Fed rate hikes, etc.), stock and bond market gyrations are likely to remain elevated. We would note that bearish sentiment among investors seems quite high despite more attractive equity and fixed income valuations, solid corporate earnings, and US economic fundamentals that appear broadly constructive, so positive developments with respect to existing headwinds could see markets surprise to the upside.
In closing, given the highly fluid market environment and the asset price volatility experienced thus far in 2022, it is understandable for investors to feel anxiety. Avoiding emotional decision-making remains key however, and we hope that this note provided some insight on the markets that will help in staying the course with your investment plan. As always, we are available to talk through any questions or concerns you may have on the markets, your portfolio and financial plan, or anything else currently top of mind, so please don’t hesitate to reach out.