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June 2022 Monthly Review
June finished the first half of a challenging 2022 with the second monthly SPX decline of more than -8%, closing the half down -20.58%. If this was year-end, this would be the 4th worst performing year of the last 80! Bonds remained a bad place to hide as the Bloomberg Barclay’s US Aggregate Bond Index finished Q2 down about 5% and down -11.05% YTD. Q1 and Q2 were the two worst performance quarters for the Agg in the last 40 years. Similarly, if this were year-end, it would be the worst year on record for the Agg. To make matters worse, the HFRX Global Hedge Fund Index was down -5.05% for the first half year.
This year’s story has been central banks initiating their fight against inflation after asserting it was transitory last year. This abrupt shift has led to a dramatic increase in rates. At the beginning of 2022, the Fed was expected to raise three times to bring the Fed funds rate in December 2022 to about 1%. However, the June expectation for December 2022 rates were at a new high of 3.72%. The uncertainty of where the Fed will stop tightening has led to a rapid rise in rates vol, which continued into June. Investment grade yields hit 5%. Meanwhile, 30-year mortgage rates hit 6%. These fast and unexpected rate rises, reduced sentiment for stocks and bonds, leading to the weak numbers for the first half of the year.
Despite June being another bad month for bonds and stocks, some positive indicators began to present, which we believe will make the second half of 2022 a different story. Inflation expectations, seen in 5 yr TIPS, did fall more than 1% from their peak in March. Commodities also began to decline significantly. Economic data was weaker as the GS Financial Conditions Index tightened the most of any quarter in the last 40 years. Further, money supply through May is on pace for the smallest annual percent increase since 1994. If inflation is near peaking, as these indicators suggest, the market may have already discounted the Fed impact and volatility can come down. Sentiment and surveys indicate a large amount of cash on the sidelines, so we believe despite weakness in the economy and earnings, 2H 2022 will allow for increased risk taking and less panic.
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