With inflation, rising rates, and now recession fears weighing on the minds of investors, 2022 has gotten off to quite a volatile start. For U.S. stocks, which declined by -19.96%, 2022 has been their third worst start to a calendar year in nearly 100 years, only surpassed by the -22% drop that started 1962 and the great depression era decline of -43% in 1932. For bonds, intermediate-term government bonds more specifically, it was their worst 6-month start to any year in history, with the index (which dates back to 1926) losing -6.65% in the first half of 2022. As would be expected, this did not bode well for asset returns across the globe, with most major equity and fixed income asset classes finding themselves in the red as of June 30th. The lone exceptions were T-bills, which were essentially flat, and commodities, one of the very few assets that provide a hedge against inflation, which gained over 18%.
U.S. equities entered 2022 facing not only the headwinds of high inflation and rising rates, but they were also starting from a level of elevated valuations, with the Shiller CAPE ratio ending 2021 at 38x, more than double the long-term average of roughly 17x. As stocks have sold off, it has been the most richly valued segments of the market that have felt the most pain. Year-to-date, investors have seen the Russell 1000 Growth index decline by -28.07% compared to a loss of -12.86% for the Russell 1000 Value. This degree of value outperformance has essentially erased growth’s post-pandemic return advantage.
Despite facing a more than 8% spike in the U.S. dollar (as measured by the DXY index) international equities fell generally in-line with their U.S. counterparts, with the MSCI EAFE declining by -19.57% in USD-terms, while the MSCI EM index fell by -17.63%. However, like in the U.S., international investors also experienced strong relative performance from the value side of the market, where attractive starting valuations and strong returns from the energy sector bolstered returns. This translated into losses of -12.12% for developed value names, while emerging value stocks lost approximately -14%.
With interest rates rising more than 100 bps at nearly all points of the curve during 2022’s first half (and more than 200 bps for the 2 year-note) it made it near impossible for investors to find positive returns in an asset class where prices move inversely to yields. The result has been a more than -9% YTD decline for the Bloomberg Treasury index, while the Bloomberg Aggregate Bond index has lost -10.35%. Credit sensitive sectors fared even worse, as prices declined not just because of interest rates increasing, but due to spread widening as well. This left the Bloomberg U.S. Credit index lower by -13.81%, with high yield bonds falling by more than -14%. While this has clearly been a challenging time for fixed income investors, it has increased the return opportunity for bonds going forward, as future returns tend to be highly correlated with your starting yield-to-maturity.
Commodities prices took a breather in June, as global recession fears creeped into prices for economically sensitive sectors, such as energy and base metals. On the month alone, investors saw prices for crude oil and natural gas decline by -6% and -33%, respectively, while copper prices sank by upwards of -14%. For the year, however, commodities continue to be one of the few (if only) risk assets to provide investors with positive returns, benefitting from the current high-inflation environment that has hurt both equity and fixed income investors. As of June 30th, the Bloomberg Commodity index had returned more than 18%, while the energy heavy GSCI index gained more than 35%.
Closed End Funds
Closed end funds have faced a series of difficult market dynamics year-to-date, in the form of elevated equity market volatility, higher interest rates, and widening credit spreads. While this had a meaningful impact on performance, and discounts, earlier in the year, the market has been somewhat calm for much of Q2, with discounts remaining relatively stable on a quarter-over-quarter basis. As a result, a substantial percentage of the losses experienced by CEF investors in Q2 were a result of NAV performance, rather than discount widening. iCM’s Tactical Closed End (TICE) strategy has weathered this storm relatively well, largely due to its tactical investment approach, which allocates between CEFs and ETFs based on the discount environment. On a YTD basis the strategy has declined by -15.63%, compared to a -13.65% decline for its blended index and a near -20% loss for the S&P 500.
iCM Tactical Strategies
iCM’s tactical strategies, which utilize ETFs and/or mutual funds, have seen strong relative performance on a year-to-date basis, particularly those strategies that are heavily invested in equities. These strong relative results have been driven by our disciplined valuations-based process, which has led to meaningful overweight positions in global value equities, high quality U.S. stocks, as well as commodities. All have performed well thus far in 2022, relative to not only broad U.S. equities, but also versus high valuation growth stocks, which have struggled amidst heightened inflation and rising interest rates.
Integrated Capital Management, Inc. is an SEC Registered Investment Advisor. Registration does not imply any certain level of skill or training. Monthly “Market Flash” is intended solely to report on various investment views held by Integrated Capital Management. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but should not be assumed to be accurate or complete. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer or recommendation to purchase or sell a security.
Past performance is no guarantee of future results. Please note that investments in foreign markets are subject to special currency, political, and economic risks. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index.
Strategy performance results are net of fund expenses, gross of advisory fees and other expenses that would be incurred in the management of client accounts, such as commissions, transaction fees, and/or custodial charges, and reflect the reinvestment of dividends and capital gains. The client’s return will be reduced by the advisory fees Integrated Capital Management, Inc. charges for the management of an account. Individual account performance and investment management fees incurred by clients may vary as fees for smaller accounts are higher on a percentage basis than for larger accounts. Investment return and principal value will fluctuate, so shares, when redeemed, may be worth more or less than their original cost. For additional information regarding advisory fees, please review Integrated Capital Management, Inc.'s Form ADV Part 2A.
TICE Blended Index comprised of 32% S&P 500/8% MSCI EAFE/38% Barclays Aggregate Bond/20% Barclays Municipal Bond/2% Cash
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