Market Flash - July 2022

Both equity and fixed income markets rallied meaningfully in July, as the “bad news is good news” mindset encouraged investors to re-embrace risk assets. We say “bad news is good news” because other than the hope that the Fed will slow their pace of rate hikes or eventually cut due to recessionary fears, the markets received very little positive news on the month -- headline inflation came in at a post-COVID high of 9.1%, the Fed hiked the Fed Funds rate by an additional 75 bps, and corporate earnings have been mixed at best. All that in mind, the S&P 500 still rallied by more than 9% during the month, while the Bloomberg Aggregate Bond index gained 2.44%, and high yield bonds advanced by nearly 6%.

Equity

Leadership trends changed dramatically in July, as large growth stocks gained 12% versus a 6.63% gain for their value counterparts. Interest rates were a key contributor to these results, as higher duration growth names rallied as interest rates declined at the longer end of the yield curve. While this helped to narrow the performance gap between growth and value names year-to-date, value still holds a commanding lead of more than 1200 bps (-7.08% vs. -19.44%).

Non-U.S. equities could not keep pace with U.S. markets during the month despite a slight reprieve from the strengthening dollar, which ended July relatively flat. The MSCI EAFE index gained 4.98%, while the MSCI EM index declined by -0.25%. Developed markets were largely held back by European equities, which were impacted by recession concerns and worries around Russia’s impact on future gas supplies. The key story for weakness in emerging markets was China, where restrictive COVID-19 policies and property market concerns drove stocks lower by -9.5%. China still accounts for more than 30% of the benchmark MSCI index, despite a near 30% pullback in the last 12 months.  

Fixed Income

Fixed income markets pulled a 180 in July, buoyed by a combination of declining longer-term interest rates and tightening credit spreads. The U.S. yield curve flattened meaningfully during the month, inverting by as much as 24 bps (10 year minus 2 year), on the back of dovish comments from the Fed and increasing concerns over a looming recession. This led treasuries higher by 1.59%, their largest monthly gain since March of 2020. 

However, credit-focused sectors were the clear leaders in July, benefitting from not just interest rate declines, but sharp contractions in yield spreads. High yield bonds saw spreads contract by more than 100 bps in July alone, while investment grade corporates saw spreads decline by 13 bps. This led to performance of 5.90% and 3.04%, respectively, some of the strongest monthly gains that investors have seen out of credit markets since 2020’s post-COVID recovery. It should be noted that this is highly inconsistent with the equity market narrative that a recession may cause the Fed to pivot and cut rates. In a contraction of the business cycle, it is doubtful that credit, specifically junk credit, will do well.

Real Assets

Broad-basket commodities gained 4.26% on the month, despite a mixed picture for individual commodity performance. Most interesting was the dynamic within the energy space, where fears over a global slowdown drove crude oil and gasoline prices lower, while natural gas soared by more than 50% as the fallout from the Russia/Ukraine war continued to put upward pressure on prices. This leaves the Bloomberg Commodity (BCOM) index higher by more than 23% for the year, compared to a loss of -12.58% for the S&P 500.

Closed End Funds

The factors that had been headwinds for closed end funds over the last few months were largely tailwinds in July, with interest rates, credit spreads, and equity markets, all working in favor of investors. This resulted in discount declines across all major asset classes and a contraction of nearly 100 bps at a universe level. iCM’s Tactical Income Closed End (TICE) strategy benefitted from these trends, gaining 5.21% on the month, compared to a gain of 4.81% for its blended benchmark.

iCM Tactical Strategies

iCM’s tactical strategies, which utilize ETFs and/or mutual funds, gave back some ground versus their respective benchmarks in July, as speculative investor behavior drove strong relative performance for high valuation U.S. stocks. That said, the majority of iCM’s strategies continue to exhibit compelling performance compared to their blended benchmarks on a year-to-date basis, as undervalued assets such as U.S. value stocks and commodities continue to lead broad U.S. equity markets by a sizable margin.