Global equity markets had an awful second quarter. When the final Wall Street bell weakly tolled on June 30th, all major international equity markets were red, leading to overall market declines not seen in decades.
To underscore how bad it has been in 2022, consider that the S&P 500 recorded its worst first six months in 52 years, and the DJIA recorded its worst first six months since 1962.
For the second quarter of 2022:
The themes that drove market performance in the second quarter were the same worries that drove markets in the first quarter and towards the end of last year. And the two most dominant themes continue to be inflation and the Fed – with the former rising to 40-year highs and the latter causing Wall Street to worry that the course of rising rates would lead to a recession.
The other themes were plummeting consumer confidence, rising food and gas prices, negative GDP numbers, declining manufacturing, a cooling-off of the housing market, not-so-wonderful corporate earnings, continued supply-chain bottlenecks, and a lot of social unrest here at home.
Further, we saw that:
Investors were unhappy with the quarterly performance worldwide, as all 36 developed markets tracked by MSCI were negative for the second quarter of 2022 – and all of them saw negative returns in the double digits. Of the 40 developing markets tracked by MSCI, 39 were negative too, with many losing more than a quarter of their value.
|MSCI FAR EAST||-13.63%|
|MSCI G7 INDEX||-16.70%|
|MSCI NORTH AMERICA||-17.07%|
|MSCI PACIFIC EX-JAPAN||-14.84%|
|MSCI WORLD EX-USA||-15.47%|
Source: MSCI. Past performance cannot guarantee future results
US equity markets turned in a terrible second quarter to add to a not-so-great first quarter, pushing the major equity markets to levels not seen in a long time. While many are suggesting that there is more pain to come from this bear, plenty of others suggest that the worst is behind us. But we won’t know for sure for another six months.
For the YTD through the end of June:
The overall trend for sector performance for the second quarter and the YTD was ugly, as all 11 S&P 500 sectors dropped for the second quarter, and only the Energy sector was positive YTD. As if those numbers weren’t bad enough, the performance leaders and laggards rotated throughout the quarter, and the ranges are substantial.
Here are the sector returns for the first two quarters of 2022:
|S&P 500 Sector||Q12022||Q22022|
Reviewing the sector returns for just the second quarter of 2022 and the first six months of the year, we saw that:
The Federal Reserve voted to increase the fed funds by an amount not seen in almost 30 years. From the Federal Reserve press release dated June 15th, 2022:
“Overall economic activity appears to have picked up after edging down in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.
The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The invasion and related events are creating additional upward pressure on inflation and are weighing on global economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1‑1/2 to 1-3/4 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.”
As the previous hike earlier this year, this rate hike was one of the most predictable and predicted rate movements the markets have ever seen. However, the magnitude of the rate hike was not expected.
“Clearly, today’s 75 basis point increase is an unusually large one, and I do not expect moves of this size to be common,” said Fed Chair Jerome Powell. And Powell also said that decisions will be made “meeting by meeting.”
Interestingly, as of the day after the Fed’s historic announcement, Wall Street assigned a probability of more than 80% that the Fed would raise rates by another 75 basis points at their next meeting at the end of July. And that probability has held steady through the end of June too.
As the quarter wound down, the Bureau of Economic Analysis released its 3rd estimate of 1st quarter GDP and reported that real gross domestic product decreased at an annual rate of 1.6%. Analysis. In the fourth quarter of 2021, real GDP increased 6.9%.
This 3rd estimate was notable because the 2nd estimate issued last month reported that GDP declined 1.5%.
“The update primarily reflects a downward revision to personal consumption expenditures (PCE) that was partly offset by an upward revision to private inventory investment (refer to “Updates to GDP”).
The decrease in real GDP reflected decreases in exports, federal government spending, private inventory investment, and state and local government spending, while imports, which are a subtraction in the calculation of GDP, increased. Nonresidential fixed investment, PCE, and residential fixed investment increased.”
The National Association of Realtors announced that existing-home sales retreated for the fourth consecutive month in May. Month-over-month sales declined in three major U.S. regions, while year-over-year sales slipped in all four areas.
From the release:
Total existing-home sales (completed transactions that include single-family homes, townhomes, condominiums, and co-ops) fell 3.4% from April.
Year-over-year sales receded by 8.6%
“Home sales have essentially returned to the levels seen in 2019 – prior to the pandemic – after two years of gangbuster performance. Also, the market movements of single-family and condominium sales are nearly equal, possibly implying that the preference towards suburban living over city life that had been present over the past two years is fading with a return to pre-pandemic conditions.”
Total housing inventory registered at the end of May increased by 12.6% from April but dropped 4.1% from the previous year.
Unsold inventory sits at a 2.6-month supply at the current sales pace, up from 2.2 months in April and 2.5 months in May 2021
“Further sales declines should be expected in the upcoming months given housing affordability challenges from the sharp rise in mortgage rates this year. Nonetheless, homes priced appropriately are selling quickly and inventory levels still need to rise substantially – almost doubling – to cool home price appreciation and provide more options for home buyers.”
The median existing-home price for all housing types in May was $407,600, up 14.8% from May 2021, as prices increased in all regions.
This marks 123 consecutive months of year-over-year increases, the longest-running streak on record.
The most significant year-over-year median list price growth occurred in Miami (+45.9%), Nashville (+32.5%), and Orlando (+32.4%). Austin reported the highest increase in the share of homes that had their prices reduced compared to last year (+14.7 percentage points), followed by Las Vegas (+12.3 percentage points) and Phoenix (+11.6 percentage points).
S&P Global reported that we saw “the weakest upturn in US private sector output since January’s Omicron-induced slowdown in June. The rise in activity was the second-softest since July 2020, with slower service sector output growth accompanied by the first contraction in manufacturing production in two years.
S&P Global Flash US PMI Composite Output Index
The University of Michigan’s Consumer Sentiment Index for June came in 14.4% below May for the lowest reading on record.
“Consumers across income, age, education, geographic region, political affiliation, stockholding and homeownership status all posted large declines. About 79% of consumers expected bad times in the year ahead for business conditions, the highest since 2009. Inflation continued to be of paramount concern to consumers; 47% of consumers blamed inflation for eroding their living standards, just one point shy of the all-time high last reached during the Great Recession.”
Four days before the end of the quarter, the US Census Bureau announced the May advance report on durable goods manufacturers’ shipments, inventories, and orders:
Sources: bea.gov; census.gov; nar.realtor; umich.edu; spglobal.com; msci.com; fidelity.com; nasdaq.com; wsj.com; morningstar.com