After a lackluster Q1, markets got off to a rocky start to begin the 2nd quarter with the S&P 500 declining by -8.72% and the Bloomberg US Aggregate Bond Index declined by -3.79% in the month of April bringing YTD losses to -12.92% and -9.5% respectively. Both stocks and bonds felt the pain of higher rates, specifically higher longer-term rates, the consequence of potentially stickier inflation being priced into the longer-term equation. The lone bright spot, commodities, gained 4.14% for the month (30.75% YTD), reflecting their typical positive correlation to inflation, and reminding investors why they are a necessary diversifier.
If we examine the cross section of returns in terms of how losses accumulated, it appears as though the lackluster beginning to Q2 was evenly dispersed throughout the month of April with the beginning being equally disappointing as the end. With a deeper dive, we learn that while the results may have been similar, weekly volatility of the S&P 500 nearly doubled from the beginning of the month to the end. Similarly, Nasdaq volatility nearly tripled over this same time period as compared to its weekly average volatility since 2003. This probably shouldn’t be surprising given that in the final 8 trading days of April, the Nasdaq only had two days that experienced less than 2% swings in either direction, with only two of the eight being positive. As a result, we saw the tech-heavy Nasdaq lose -13.24% to begin the quarter with similar results of -12.08% in the broader US Large Cap Growth index (-20.03% YTD). Fortunately, this was offset by a much better showing from the value side of the universe with the Russell 1000 Value declining by only -5.64% to begin the marking period (-6.34% YTD). This pattern was nearly identical in small cap space with value (-7.76%) outperforming growth (-12.27%) by 451 bps on the downside.
We saw a similar story overseas, where core developed and emerging market indexes declined by -6.47% and -5.56%, respectively. The value side of the market performed a bit better with value down -5.06% in the developed world and in line (-5.64%) in the emerging world. The real story outside of the US has less to do with style and more to do with the overall strength of the USD acting as a headwind for US investors. In local currency terms the MSCI EAFE index declined by -1.39%, the remaining ~5% of the total decline (-6.47%) was driven by the change in the USD. While less pronounced, the story is the same in the emerging world. This has left the greenback, much like US asset markets, in a significantly overvalued position vs. both the developed world basket of currencies and especially the emerging world currencies, a likely tailwind for US investors in foreign assets going forward. Much of this, of course, is driven by the relative position in terms of the rate hike cycle of the US as compared primarily to the ECB, with US markets processing in more tightening and higher rates, factors that attract capital. With a 2-year treasury yield of north of 2.5%, this implies 10-11 25bps hikes or 250bps of tightening already factored into markets as opposed to about 120bps of tightening accounted for abroad, increasing the likelihood that the ECB will need to do more than the US going forward.
U.S. Fixed Income markets fell -3.79% continuing their multi month decline, as rates across the yield curve rose leaving little room for positive performance in any sub-asset class. While the broad trend was rising rates, longer maturities rose slightly more than short maturities, with the slope between the 10-year and 2-year yields steepening by 19 bps. This is a welcoming reversal compared to the near inversion we saw in March. Emerging markets debt suffered most, with dollar denominated bonds dropping by -6.03%, as we saw the continued effects of the conflict in Ukraine and a corresponding U.S. dollar surge. Additionally, credit spreads widened, by 19 bps in investment grade and 54 bps in high yield, as bond investors started to price in the possibility of an earlier than expected recession.
For yet another month, commodities have provided strong relative performance vs. US equities, with the asset class gaining 4.14% in April compared to a decline of -8.72% for US stocks. With no end in sight for the Russia/Ukraine conflict, oil prices remained at their elevated levels and natural gas prices continued higher. In fact, the European Union continues to inch closer to a complete ban on Russian oil imports, which would likely provide further support for continued elevated prices. In addition to a strong market for energy commodities, agricultural commodities also continued their rise, with only industrial and precious metals failing to produce gains on the month due to investor expectations for slower demand. Despite this weakness, the Bloomberg Commodity Index has advanced an impressive 30.75% year to date.
Closed End Funds
Closed end funds have a variety of risk factors with the most meaningful being the level of interest rates, followed by credit spreads and equity volatility (beta), none of which have been particularly beneficial thus far in 2022.
The end result was a 156 bps of aggregate discount widening, with CEF Munis widening the most (nearly 200bps) and international CEFs the least (approximately 100bps). This leaves 83% of the universe trading at a discount to NAV as opposed to only 59% at the beginning of November, reflecting the improved buying climate we have seen over the past few months. For the month, the iCM TICE strategy declined by just under -6% (gross of management fees but net of fund expenses) as compared to -8.72% for the S&P 500 and -5.08% for its blended index. As I mentioned previously, a byproduct of the recent volatility and declines is the improvement in fundamentals not only at an aggregate level but specifically in the increased number of new buys we are finding now vs just a few months ago. While we do continue to see a few headwinds for CEFs in the coming months (equity volatility and credit spreads specifically), we do believe that this will likely be muted somewhat by an improving rate environment and higher overall yields for the universe and our portfolio.
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