Highlights from the Global Markets in 2Q22

U.S. Equity: The S&P 500 Index sank 16.1% in 2Q22 on concerns over rising rates and a slowing economy; the Index is down 20.0% YTD. All sectors posted negative returns, but the worst were Consumer Discretionary (-26%), Communication Services (-21%), and Technology (-20%). Energy, Utilities, and Consumer Staples each lost roughly 5%.

Value outperformed growth by a substantial margin (Russell 1000 Value: -12.2%; Russell 1000 Growth: -20.9%) and the YTD differential is more than 15 percentage points.

Global ex-U.S. Equity: The MSCI ACWI ex USA Index sank 13.7% (Local: -8.3%), bringing its YTD loss to 18.4% (Local: -11.9%). The U.S. dollar continued to strengthen, benefiting from its “safe haven” status as well as attractive interest rates relative to other developed markets. The yen lost 11% versus the dollar, the euro 6%, and the British pound 8%. Across developed market countries, losses were broad-based, with nearly all posting double-digit declines.

As in the U.S., Value (MSCI ACWI ex USA Value: -11.9%) outperformed Growth (MSCI ACWI ex USA Growth: -15.7%). Technology (MSCI ACWI ex USA Technology: -23%) fared the worst with Energy (MSCI ACWI ex USA Energy: -5%) being the relative outperformer.

Emerging Market Equity: Emerging markets (MSCI Emerging Markets: -11.4%; Local: -8.1%) outperformed developed markets for the quarter, led by China (MSCI China: +3%), which was helped by improving data as lockdowns ended, as well as promises of government stimulus. Returns were mixed but negative across regions: Latin America (-22%), Emerging Europe (-21%), and Emerging Asia (-9%).

U.S. Fixed: The Bloomberg US Aggregate Bond Index fell 4.7% in 2Q as rates rose sharply and spreads widened. Mortgages and corporates underperformed U.S. Treasuries, and the yield-to-worst of the Aggregate Index climbed to 3.7%. High yield corporates (Bloomberg High Yield: -9.8%) underperformed investment grade, and the Index is down 14.2% YTD.

Rates were volatile during the quarter; the 10-year U.S. Treasury hit an intra-quarter high of 3.49% in June, the highest since 2011, before closing the quarter at 2.98%. TIPS (Bloomberg TIPS: -6.1%; -8.9% YTD) sharply underperformed nominal U.S. Treasuries for the quarter as longer-term inflation expectations declined. The 10-year breakeven spread was 2.3% at the end of the quarter, down from 2.8% on 3/31/22.

Global ex-U.S. Fixed: Interest rates also rose overseas and the U.S. dollar continued to strengthen, hurting unhedged fixed income returns. The Bloomberg Global Aggregate ex USD fell 11.0% (hedged: -4.0%). Losses were broad-based with double-digit declines across Europe, in Japan, and in the U.K.

Emerging Market Debt: Emerging market debt was hurt by rising rates; the JPM EMBI Global Diversified fell 11.4% and the local currency JPM GBI-EM Global Diversified was off 8.6%.

Municipal Bonds: The Bloomberg Municipal Bond Index fell 2.9% for the quarter and is down 9.0% YTD. The shorter duration 1-10 Year Blend fell 0.8% for the quarter and 5.6% YTD. The ratio of AAA Municipal yields to the 10-year U.S. Treasury increased to 92%, up from 69% as of year-end. Outflows continued (25 consecutive weeks) and reached $76 billion, the largest drop since data was first collected (1992). Municipal credit fundamentals remained sound with state and local revenues benefiting from strong employment and property taxes.

Real Assets: Following very strong 1Q results, real assets as a group posted negative returns in 2Q as concerns over slowing global growth mounted. A lone exception was the energy-heavy S&P GSCI Index, which eked out a 2.0% gain during the quarter while the Bloomberg Commodity TR Index fell 5.7%. WTI Crude closed the quarter at $106/barrel, up from $100 on 3/31/22 and $76 at year-end. Gold (S&P Gold Spot Price Index: -7.5%), listed infrastructure (DJB Global Infrastructure: -7.1%), REITs (MSCI US REIT: -16.9%), and TIPS (Bloomberg TIPS: -6.1%) declined.