U.S. equity investors experienced a great deal of volatility in May, as they were forced to digest uninspiring inflation and GDP data and continued to grapple with ongoing concerns over future interest rate hikes and imminent quantitative tightening. Despite these headwinds, the S&P 500 still managed to find itself in slightly positive territory at month end, rallying more than 8% off its intra-month bear market low. Fixed income markets also turned in a positive month, their first of 2022, with the Bloomberg Aggregate Bond index gaining 0.64%. Gains were primarily driven by declines in treasury rates, as the yield on the 10-year note ended the month at 2.84%. On the real asset front, broad-basket commodities were once again a top performing asset class (+1.52%), buoyed by continued strength out of the energy complex.
U.S. equity performance remained divided during the month, as it has been for much of 2022. On the winning side, we again had large value stocks, which ended the month higher by nearly 2%. Conversely, growth stocks declined by -2.32%, placing the Russell 1000 Growth index squarely into bear market territory for the year. Value stocks benefitted from continued gains in commodities prices and, subsequently, the energy sector (+15.77%), while traditional growth sectors, technology (-0.85%) and consumer discretionary (-4.85%), struggled amidst a wave of disappointing earnings reports and forward guidance.
International equities outperformed slightly in May, as a mid-month reversal in the dollar added to returns for U.S. investors. That said, however, the USD (as measured by the DXY index) continues to trade near its highest levels in the prior 20 years and has created meaningful headwinds for non-U.S. developed markets equities as of late, detracting more than 600 bps from USD-based returns thus far in 2022 and more than 1,100 bps from returns over the last 12 months. From a style perspective, the value/growth story was similar overseas, with the stocks and sectors most levered to commodities markets performing disproportionately well.
The upward momentum in U.S. interest rates took a breather in May, as markets grappled with concerns over the potential impact of inflation on future economic growth and earnings for U.S. companies. This resulted in a downward shift in rates from the 2-year point of the yield curve out to the 10-year note, and a subsequent +0.64% rally for the Bloomberg Aggregate Bond index. Performance for the broad investment grade benchmark was also supported by the credit side of the market, with the Bloomberg Credit index gaining 0.89%, as credit spreads tightened toward month end, amidst rallying equity markets. Outside of the U.S., emerging markets local bonds were a standout amongst major fixed income asset classes and a clear beneficiary of late May’s risk-on rally, gaining 1.76% for the month.
Broad-basket commodities extended their streak of strong performance in May, gaining 1.52%. Investors continued to see upward pressure on oil prices, particularly as China’s COVID lockdowns eased and the European Union instituted a ban on 90% of its Russian oil imports, which is expected to be fully implemented by year-end. Conversely, prices for agricultural commodities and industrial metals fell, as expectations of slower demand were at the forefront of investors’ minds. Despite this somewhat mixed performance picture across individual commodities, energy-related gains outweighed losses elsewhere, bringing the return for the Bloomberg Commodity index to over 32% YTD, while the energy-heavy GSCI index has now gained 47% over the same time period.
It is worth noting that these returns are not the result of spot price gains alone, in practice investors generally access commodities markets through futures contracts. As such, the shape of the futures curve can be either a positive or negative for investors’ returns (i.e. roll yield). For much of the year, most major energy-related curves have been steeply backwardated (i.e. future prices are lower than spot), which has provided an additional source of return for investors and has the potential to continue to provide a positive roll yield as we move forward.
Closed End Funds
Closed end funds enjoyed a relatively strong month, benefiting from many of the factors that had led to wider discounts earlier in the year. Fixed income fund discounts benefited on two fronts -- taxable funds from tightening credit spreads and municipal funds from strong municipal bond performance and excess duration. Equity fund discounts also narrowed, rallying in the latter half of the month, as the VIX experienced a peak-to-trough drop of nearly 25%. As a result, investors saw industry-wide discounts narrow by roughly 40 bps on the month, following a rather difficult April. In-line with expectations, iCM’s Tactical Income Closed End (TICE) strategy performed well in this environment (+0.71%), besting its blended benchmark (+0.67%), as well as the S&P 500 (+0.18%).
iCM Tactical Strategies
iCM saw both strong absolute and relative performance from the majority of our strategies on the month, as diversification benefitted investor portfolios and the market continued to punish high valuation growth stocks. Within our strategies’ fixed income allocations, performance was driven by a slight over-weight to investment grade credit and an out-of-benchmark position in emerging markets local bonds, one of the month’s top performing fixed income asset classes. The equity portion of our strategies continued to benefit from our focus on asset classes with the most attractive valuations, both within the U.S. and internationally, in addition to our broad-basket commodities allocation.
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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