Monthly Market Commentary

As of July’s end, both the S&P 500 Index and Nasdaq Composite Index posted their fifth consecutive monthly gain. The positive equity performance comes on the back of cooling inflation, better than expected earnings, and increased probabilities of a soft landing. Broad-based emerging market equities (+6.0%) were among the best performers, followed by US small-caps (+5.6%) and US mid-caps (+4.2%). Bonds were mixed as high yield credits rose 1.1% while 7-10 year US Treasuries fell 0.7%. Commodities produced positive returns as crude oil was up 15.1%, silver increased 8.6%, broad-based commodities gained 6.7%, and gold rose 2.3%.

Despite uncertainty around monetary policy and economic fundamentals raising recession risks, all three major equity indexes were up in the first half of 2023. The Nasdaq Composite Index rose 32% on the back of an AI-technology inspired rally, posting its best first half of the year since 1983. US growth stocks (+21.1%) were among the best performers, followed by US largecaps (+16.8%) and US value (+12.0%). Bonds also produced positive returns as high yield credits rose 4.5%, investment grade corporates gained 4.3%, and the US Aggregate Bond Index was up 2.3%. Commodities were mixed given gold increased (+5.1%) while crude oil, broad-based commodities, and silver decreased (-9.4%, -8.6%, and -5.1%, respectively).

Despite debt ceiling worries, weak market breadth, and stubborn inflation , the Nasdaq 100 Index rose 7.7% in May amid an artificial intelligence (AI)-related rally. The S&P 500 Index was also able to eke out a 0.4% gain but the Dow Jones Industrial Average Index fell 3.2%. US growth stocks (+2.5%) and US large-caps (+0.5%) were among the best performers while international developed equities (-4.0%) and US mid-caps (-3.1%) were among the worst. Bonds were lower as investment grade corporates decreased 1.8%, 7-10 year US Treasuries fell 1.4%, and high yield credits were down 1.2%. Commodities produced negative returns as crude oil declined 10.2%, silver was down 6.0%, broad-based commodities decreased 5.9%, and gold fell 1.3%.

Despite a slowing economy, lingering inflation concerns, and further banking turmoil, all three major US indices posted gains in April likely on the back of better than expected earnings. International developed equities (+2.9%) and US value stocks (+1.7%) were among the best performers while US small-caps (-2.8%) and US mid-caps (-0.8%) were among the worst. Bonds were mostly higher as 7-10 year US Treasuries increased 0.8%, investment grade corporates rose 0.6%, and the US Aggregate Bond Index gained 0.6%. Commodities produced mixed returns as silver, crude oil, and gold were up (+4.0%, +1.6%, and +0.9%, respectively), while broad-based commodities were down (-0.8%).

Despite bank failures and uncertainty regarding monetary policy and interest rates, equities posted gains in Q1 as the Nasdaq 100 Index was up nearly 17%, notching its best quarter since the second quarter of 2020. US growth stocks were among the best performers (+9.6%), followed by international developed equities (+8.5%) and US large-caps (+7.5%). Bonds also fared well as investment grade corporates rose 4.7%, 7-10 year US Treasuries increased 3.9%, and high yield credits gained 3.7%. Commodities produced mixed returns as both gold and silver were up (+8.0% and +0.5%, respectively), while broad-based commodities and crude oil fell (-5.9% and -5.2%, respectively).

Amid restored inflation worries and an upward repricing of terminal rates, equities posted losses in February. For the month, broad-based emerging market equities were among the worst performers (-6.9%), followed by international developed equities (-3.0%) and US value (-3.0%). Bonds also declined as investment grade corporates were down 4.2%, 7-10 year US Treasuries fell 3.3%, and the US Aggregate Bond Index decreased 2.7%. Similarly, commodities produced negative returns: silver dropped 12%, gold declined 5.4%, broadbased commodities decreased 5.0%, and crude oil down 3.0%.

Amid abating interest rate hike fears and inflation concerns, equities were up in January as the Nasdaq gained 10.7%, marking its best January since 2001. US small-caps were among the best performers (+9.5%), followed by US mid-caps (+9.3%), and broad-based emerging market equities (+8.9%). Bonds also posted gains as investment grade corporates increased 5.2%, high yield credits rose 3.7%, and 7-10 year US Treasuries were up 3.6%. Aside from gold (+5.8%), commodities produced negative returns as crude oil fell 1.1%, silver declined 0.9%, and broad-based commodities were down 0.9%.

Amid soaring inflation, high interest rates, geopolitical tensions, and recession concerns, equities fell in 2022 as the Nasdaq, S&P 500, and Dow Jones indices had their worst year since 2008 (-33.1%, -19.4%, and -8.8%, respectively). US value held up the best (-5.4%) while US growth performed the worst (-29.5%). Within US equity sectors, energy posted massive gains (+65.7%) and utilities were also up (+1.6%), but all other sectors declined. Bonds also struggled as the Bloomberg US Aggregate Bond Index posted its worst year in history (-13.0%). Municipal bonds fared better (- 7.4%) while investment grade corporates saw bigger losses (-17.9%). Aside from gold (-0.8%), commodities had a strong year as crude oil gained 29.0%, broad-based commodities were up 15.2%, and silver increased 2.4%

Amid easing inflation and hopes of reduced interest rate increases, equities were up in November as both the Dow Jones Industrial Average and S&P 500 indices posted their second consecutive month of gains since August 2021. Global equities outperformed as both broad-based emerging market and international developed equities were up (+14.7% and +13.2%, respectively). Bonds also posted gains as investment grade corporates increased 6.7%, municipal bonds rose 4.8%, and the US Aggregate Bond Index was up 3.8%. Aside from crude oil (-1.8%), commodities produced positive returns as silver gained 16%, gold rose 8.5%, and broad-based commodities were up 3.6%. 

Amid hopes for a slowing pace of interest rate hikes, equities mainly were up in October as the Dow Jones Industrial Average Index gained 14%, posting its best month since January 1976. US small-caps were among the best performers (+12.1%), followed by US value stocks (+11.5%), and US mid-caps (+10.5%). Bonds were mixed as both high-yield credits and TIPS increased (+3.4% and +1.4%, respectively) while both the US Aggregate Bond Index and 7-10 year US Treasuries fell (-1.3% and -1.5%, respectively). Aside from gold (-1.8%), commodities produced positive returns as crude oil was up 9.6%, broad-based commodities rose 1.6%, and silver gained 0.7%.

Amid increased recession risks and additional interest rate hikes, equities tumbled in September as the S&P 500 Index fell 9.3%, posting its worst September since 2002. Broad-based emerging markets were among the worst performers (-11.3%), followed by US growth stocks (-10.5%), and US small-caps (-9.8%). Bonds also struggled as Treasury-inflation protected notes declined 6.7%, investment grade corporates returned -6.0%, and 7- 10 year US Treasuries fell 4.7%. Aside from silver (+5.6%), commodities produced negative returns as crude oil was down 10.7%, broad-based commodities fell 8.1%, and gold declined 2.9%

In August, equities struggled, likely due to concerns of further anticipated restrictive monetary policy. For the month, international developed equities were among the worst performers (-6.1%), followed by US growth stocks (-5.1%) and US small-caps (- 4.3%). Bonds also had a challenging month as investment grade corporates declined 4.4%, high yield credit returned -4.3%, and 7-10 Year US Treasuries fell 3.9%. Commodities produced negative returns as silver was down 11.3%, crude oil fell 6.3%, gold decreased 2.9% and broad-based commodities declined 0.4%.

Despite some turbulent months in the first half of the year, equites posted strong returns in July given the Nasdaq-100 Index gained 16.4% since June 16th , likely on the back of an anticipated dovish Federal Reserve. For the month, US growth was the best performer (+12.5%), followed by US mid-caps (+10.9%) and US small-caps (+10.1%). Bonds also fared well as high yield credit returned 6.7%, investment grade corporates gained 4.4%, and TIPs rose 4.3%. Commodities posted mixed returns as both broad-based commodities and silver were up (+3.8% and +0.3%, respectively) while both gold and crude oil fell (-2.6% and -2.9%, respectively). 

Amid rising recession fears, inflation & interest rate concerns, and slowing economic growth, equities had their worst first half of the year in decades as the S&P 500 fell 20%. While value and broad-based emerging markets were only down 11% and 17%, respectively, growth stands to be the worst performer, given its 29% decline. Bonds also posted negative returns ranging from municipal bonds down 8% to investment grade corporates declining 16%. However, both crude oil and broad-based commodities were up, gaining 48% and 18%, respectively. 

Despite negative returns in April and market turbulence throughout May, equities finished marginally higher for the month. US small-caps were amongst the best performers (+1.9%), followed by international developed equities (+1.7%) and US value (+1.7%). Bonds also delivered mostly positive returns as investment grade corporates were up 1.9%, high yield credits rose 1.6%, and municipal bonds gained 1.5%. Commodities produced mixed returns as crude oil and broad-based commodities rose (+10.8% and +1.9%, respectively) while gold and silver fell (-3.3% and -5.7%, respectively). 

April was a challenging month for equities as stocks declined. US growth stocks were amongst the worst performers (-13.6%), followed by US large-caps (-8.8%) and US small-caps (-7.8%). Bonds also struggled as investment grade corporates were down 6.7%, 7-10 year US Treasuries fell 4.2%, and high yield credits declined 4.2%. Commodities produced mixed returns as crude oil and broad-based commodities rose (+4.1% and +3.9%, respectively) while gold and silver fell (-2.1% and -8.0%, respectively).

The S&P 500 Index returned -4.6% during Q1 2022, and the MSCI All Country World Index fell -5.3%. Q1 saw a notable rotation into inflation sensitive assets. The Bloomberg Commodity Index was up 25.6%, the United States Oil Fund LP (USO) increased by 36.4%, and the Energy Select SPDR Fund (XLE) rose 39%.

On Thursday, February 24th, Russian President Vladimir Putin launched its invasion of Ukraine introducing a new uncertainty to markets. Globally, Russia makes up a small portion of the economy as its weight in the MSCI All Country World ETF (ACWI) is 0.21%. The exposure of US equities to Russia is small. According to JP Morgan Research, US companies have low direct exposure to both Russia (0.6% for Russell 1000) and Ukraine (0.1%). However, Europe is more exposed to the risks of the conflict as they are more economically linked with the countries.

At the FOMC meeting on Wednesday, January 26th, the Federal Reserve kept the federal funds rate at the 0-0.25% range and suggested tapering should end in March, but also indicated that it may soon be time to raise rates. As the Consumer Price Index (CPI) rose to its highest reading in 40 years of 7% in December from the prior year, the Fed seems ready to hike rates in order to combat inflation. “With inflation well above 2% and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate,” read the statement from the FOMC. It is believed that the Fed is likely to raise rates by 25bps at the next FOMC meeting in March, which would mark the first interest rate hike since December 2018. Fed Chairman Jerome Powell also stated, “I think there’s quite a bit of room to raise interest rates without threatening the labor market,” causing many to think that this tightening cycle may be more aggressive with numerous rate hikes to come over the course of 2022.

The number one question coming from clients is how
to prepare portfolios for higher inflation. As communicated in our previous commentaries, we indicated that inflation would not be transitory. As a refresher, cyclically oriented sectors such as energy, materials, industrials, and financials have historically shown higher sensitivity to rising inflation. Energy stocks were the best performing sector in the US last year (refer to the second page). Additionally, commodities serve to provide additional protection as they tend to move at a different stage of the inflation cycle.

As the Omicron variant and inflation threats raised concerns for markets in November, US equities did not have a smooth month given the spike in volatility. Though the S&P 500 fell 1%, it outperformed small-caps and mid-caps which posted losses of 2% and 3%, respectively. As seen in the charts below, all sectors aside from Technology and Consumer Discretionary declined as Financials and Communication Services were the biggest laggards. Among factors, growth outperformed (+1%) followed by more defensive plays (quality -1%, low volatility -1%, dividend strategies -2%) while value trailed (down 3-4%).

The S&P 500 was up 6.9% for the month of October thanks to a strong earnings season. The S&P 500 outperformed US Small-Caps (Russell +4.2%), MSCI EAFE (3.2%), and MSCI EM (+1.1%). Tesla was up 43% in October and was responsible for 13% of the S&P 500’s October gains. Overall, it was a very risk-on month with stocks and commodities doing well while most fixed income sectors underperformed as government bond yields surged globally. See below for the month on month and year on year percentage changes for major asset classes.  

The Delta variant, originally discovered in India towards the end of last year, has recently caused an uptick in Covid cases around the world. Although the strain does not make people sicker, scientists are concerned because it is more contagious and can infect those who are fully vaccinated. According to the CDC, the Delta variant accounted for 83% of Covid cases in the US as of July 20th. As seen in the chart below, the total number of cases is still low relative to peak levels. However, many are still worried that mask mandates, social distancing requirements, and even quarantine measures may return, effectively slowing and endangering the economic resurgence.

The Delta variant, originally discovered in India towards the end of last year, has recently caused an uptick in Covid cases around the world. Although the strain does not make people sicker, scientists are concerned because it is more contagious and can infect those who are fully vaccinated. According to the CDC, the Delta variant accounted for 83% of Covid cases in the US as of July 20th. As seen in the chart below, the total number of cases is still low relative to peak levels. However, many are still worried that mask mandates, social distancing requirements, and even quarantine measures may return, effectively slowing and endangering the economic resurgence.

The Delta variant, originally discovered in India towards the end of last year, has recently caused an uptick in Covid cases around the world. Although the strain does not make people sicker, scientists are concerned because it is more contagious and can infect those who are fully vaccinated. According to the CDC, the Delta variant accounted for 83% of Covid cases in the US as of July 20th. As seen in the chart below, the total number of cases is still low relative to peak levels. However, many are still worried that mask mandates, social distancing requirements, and even quarantine measures may return, effectively slowing and endangering the economic resurgence.

Fed Turns Hawkish: Despite its pledge to avoid tightening financial conditions until the economy reaches maximum employment, the Federal Reserve signaled rate hikes may come sooner than previously expected in the June FOMC meeting. Fed Chair Powell acknowledged that inflation may come faster and last longer than anticipated. According to the updated dot plot projections, 7 of 18 committee members predict a possible rate increase in 2022. More notably, the forecast also indicated all but 5 committee members suggest the Fed will hike rates twice in 2023. 

Biden's Infrastructure Plan: Last week, President Biden unveiled his $6 trillion budget for 2022 in reference to his agenda and aspirations for the next decade. In addition to his $4 trillion American Jobs Plan and American Families Plan, Biden aims to reinvest in research and development, education, public health, clean energy, and the social safety net. The budget will also be used to enhance and improve infrastructure through updating highways, ports, bridges, and airports. 

April Performance: The S&P 500 Index was up 5% in April, driven by strong earnings and improving macro-economic data. Enthusiasm for stocks remains quite high with individual investors holding more equities than ever before, fueled by a blowout earnings season, the prospect of a strong economic recovery, and government stimulus. According to data from JP Morgan and the Federal Reserve, stock ownership among US households rose to 41% of their total financial assets in April, the highest level on record.

With all the hype around the recent GameStop saga and some of the questions we have already incurred, we wanted to address what happened and our thoughts and takeaways regarding this fascinating topic.  While it may not have meaningful impacts on the broad economy for now, it is an example of the potential excesses brewing under the hood.  Investors need to be aware of this risk and prepare rather than predict when it will end.