Conway’s QuickTake: Week of July 4, 2022


Here’s What Happened Last Week: 

U.S. Equity Markets

  • U.S. stocks gave back some of last week’s gains amidst worries that the Fed’s efforts to quell inflation could push the economy into a recession. 
  • Last week, the S&P 500 Index closed out the worst first half of the year since 1970. Notably, the benchmark reached its all-time high on January 3rd, amplifying the extent of the year-to-date drawdown. 
  • Defensive areas of the market generally outperformed. Within the S&P 500, the best performing sectors included utilities, consumer staples, and healthcare. The energy sector was also positive reflecting higher oil prices. 
  • More cyclically exposed and growth-oriented sectors lagged. Bottom performers included the consumer discretionary, communication services, and IT sectors. 
  • Year-to-date, the S&P 500 Index remains right on the verge of bear market territory or a decline of 20% or greater. Growth stocks continue to lag value shares while small-caps generally have lagged large-caps. 
Source: iStock 2022

International Equity Markets

  • Developed and emerging non-U.S. equities also declined last week. Emerging market stocks fell slightly less than the developed, international MSCI EAFE Index. 
  • European equities were lower due to concerns about higher inflation and potentially slower growth. The euro also weakened against the U.S. Dollar, hurting USD returns. 
  • Japanese stocks declined, led lower by concerns that hawkish actions by many global central banks could lead notable developed world economies into a recession. The yen continued to weaken relative to the USD and stayed close to a 24-year low. 
  • Chinese equities were close to flat last week, boosted by strong factory data and easing coronavirus restrictions.

Credit Markets

  • Lower growth expectations pushed treasury yields lower. The benchmark 10-year U.S. Treasury yield was as low as 2.79% on Friday, although it closed at 2.88%. 
  • Lower yields contributed to positive investment grade performance last week as the Bloomberg U.S. Aggregate Index was over 1% higher. Positive bond market performance helped soften the blow of lower equity returns in what is hopefully a return in bonds offering more of a ballast in diversified portfolios. 
  • Municipals also rallied last week, benefitting from lower yields and a flight to quality amidst recessionary fears.  
  • Corporate investment-grade bonds also had a constructive week driven by lower yields and lower than expected supply. 
  • High yield bonds lagged as any gains from duration were offset by wider spreads. Some technical signs also indicated that investors were repositioning portfolios ahead of the start of Q3 which resulted in asset class outflows. 

U.S. Economic Data/News

  • Economic data continued to underwhelm expectations suggesting that growth is continuing to slow. This indicates that the Fed’s efforts to restrain demand to ease inflation is working to a degree. 
  • The Conference Board’s consumer confidence index was much lower than expected and measures of manufacturing activity in the Mid-Atlantic region fell to levels not seen since the height of the pandemic.
  • The highly watched personal consumption expenditures (PCE) index fell in May by 0.4%, the first decline so far this year. Underneath the hood, goods purchases fell 1.6% while services spending rose modestly. 
  • The Atlanta Fed’s GDPNow model, which provides an estimate of annualized quarterly GDP growth, is now forecasting a -1.0% drop during Q2. If accurate, this would suggest the economy meets a commonly accepted recession indicator of two consecutive quarters of negative GDP growth. 

International Economic Data/News

  • The ECB maintained its more hawkish stance and is possibly paving the way for a possible 0.50% interest rate hike as soon as this month. That said, ECB action will likely be data-dependent, and tightening efforts could subside if growth were to weaken. 
  • Eurozone inflation rose to 8.6% in June, driven by higher energy and food costs. Like in the U.S., record inflation levels are quickly eroding consumer confidence. 
  • The Bank of Japan’s recent corporate survey suggested that sentiment among large manufacturers fell just as factory output slowed sharply. Notably, slower output could be impacted by restrictive Chinese lockdowns. 
  • China has continued to ease quarantine restrictions following notoriously rigid lockdown procedures. Recently, quarantine times for inbound travelers were halved from 14 to 7 days with the preceding 3 days to be monitored at home. 

Looking ahead…

Wednesday, July 6, 2022

  • Eurozone Retail Trade
  • US ISM Services PMI

Thursday, July 7, 2022

  • Germany Industrial Production
  • US Initial Claims for Unemployment Insurance
  • US ADP Nonfarm Payrolls

Friday, July 8, 2022

  • US Unemployment Rate
  • US Labor Force Participation
  • US Hourly Earnings
  • China Inflation Rate
  • China Producer Price Index

Sources: The WSJ, T. Rowe Price Global Markets Weekly Update, YCharts, Piton Investment Management
This commentary was written by Craig Amico, CFA®, CIPM®, Associate Director, Noreen Brown, CFA®, Chief Wealth Strategist and Steven Melnick, CFA®, Associate Director at Summit Financial, LLC., an SEC Registered Investment Adviser (“Summit”), headquartered at 4 Campus Drive, Parsippany, NJ 07054, Tel. 973-285-3600. It is provided for your information and guidance and is not intended as specific advice and does not constitute an offer or solicitation to buy any securities mentioned. Summit is an investment adviser and offers asset management and financial planning services. Indices are unmanaged and cannot be invested into directly. The periodic returns are represented by the following indices: large-cap value by Russell 1000 Value TR Index, large-cap blend by Russell 1000 TR Index, large-cap growth by Russell 1000 Growth TR Index, mid-cap value by Russell Mid Cap Value TR Index, mid-cap blend by Russell Mid Cap TR Index, mid-cap growth by Russell Mid Cap Growth TR Index, small-cap value by Russell 2000 Value TR Index, small-cap blend by Russell 2000 TR Index, and small-cap growth by Russell 2000 Growth TR Index, international developed by the MSCI EAFE NR USD Index, Emerging Markets by the MSCI EM NR USD Index, U.S. Aggregate Bond by the Bloomberg US Agg Bond TR USD Index, U.S. Municipals by the Bloomberg Municipal TR USD Index, and Corporate High Yield by the Bloomberg US Corporate High Yield TR USD Index. The S&P 500 Index is a market capitalization-weighted Index of 500 widely held stocks often used as a proxy for the stock market. It measures the movement of the largest issues. Standard and Poor’s chooses the member companies for the 500 based on market size, liquidity, and industry group representation. Included are the stocks of eleven different sectors. The Nasdaq Composite Index is a large market capitalization-weighted index of more than 2,500 U.S.-domiciled stocks. The index’s composition is heavily weighted to the information technology sector, with consumer services, health care, and financials the next most prominent industries. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index representing approximately 90% of the total market capitalization of that index. It includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 3000 Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market. It is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected. The MSCI EAFE Index (Europe, Australasia, Far East) captures large- and mid-cap representation across developed markets countries around the world, excluding the U.S. and Canada. The index covers approximately 85% of the free float-adjusted market capitalization in each country. The MSCI Emerging Markets Index captures large- and mid-cap representation across emerging markets countries across the world. The index covers approximately 85% of the free float-adjusted market capitalization in each country. The MSCI Europe Index captures large- and mid-cap representation across developed markets countries in Europe. The index covers approximately 85% of the free float-adjusted market capitalization across the European developed markets equity universe. The MSCI China Index captures large- and mid-cap representation across China A-shares, H shares, Red chips, P chips, and foreign listings. The index covers about 85% of the China equity universe. The Nikkei 225 Index is a stock market index for the Tokyo Stock Exchange which is price-weighted operating in Japanese Yen. The index measures the performance of 225 large, publicly owned companies in Japan from different industry sectors. The Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS, and CMBS (agency and non-agency. The Bloomberg Municipal Bond Index covers the U.S. dollar-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. The Bloomberg U.S. Corporate High-Yield Index measures the U.S. dollar-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on the EM country definition, are excluded. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. CPI is often used as a barometer to measure inflation. The Caixin China General Services PMI (Purchasing Managers’ Index) is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 400 private service sector companies. The index tracks variables such as sales, employment, inventories, and prices. A reading above 50 indicates that the services sector is generally expanding; below 50 indicates that it is generally declining. The 2s30s spread is the difference between the yield on the 30-year Treasury bond and the yield on the 2-year Treasury note.
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