Market Reviews 2022

After the difficult first half of 2022, the US equity market bounced sharply higher in July and early August. To some extent, sellers had reached a point of exhaustion, easing the downward pressure that had afflicted the market for months. Corporate earnings reports were also generally good, easing fears that a severe economic slowdown might be on the horizon. Other indicators remained steady, although consumer prices continued to increase more rapidly than either policymakers or the public would prefer, even as prices of major commodities, most notably oil, fell. By mid-August, some market chatter suggested that the Federal Reserve may be nearing the end of its current round of monetary tightening. Fed officials challenged this last development, with several making public statements to the effect that no, the Fed is not nearly done raising interest rates. The strongest statement, and the one with the sharpest market impact, came from Fed Chair Jerome Powell, who, in brief remarks August 26 from the Kansas City Fed’s annual economic conference at Jackson Hole, Wyoming, made clear that the central bank will not shy away from causing economic pain in its efforts to quell inflation. After he spoke, interest rates jumped and the stock market fell. The market slide continued through a very weak September. The S&P 500 ended with a return of –4.88% for the quarter. The Mid-cap 400 index returned –2.46%, and the Small-cap 600 index –5.20%. [Index returns: Standard and Poors]

Global markets also fell, although not quite so dramatically as those in the US. The MSCI EAFE international equity index returned –3.59% in local currencies. However, tightening US monetary policy and hawkish rhetoric from the Fed continued to drive the US dollar sharply higher. It rose to 144.71 yen, from 135.69 at the end of June. It strengthened to $1.1134 against the pound Sterling, from $1.2162 on June 30. The euro fell below dollar parity, ending September at $0.9783, compared to $1.0469 three months earlier. The currency moves again worked against US investors in foreign assets. As a result, EAFE had a return of –9.36% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]

Monetary policy and rhetoric continued to drive interest rates sharply higher. The yield on the two-year US Treasury note ended the quarter at 4.22%, up from 2.92% at the end of June. The ten-year yield ended September at 3.83%, up from 2.98% three months earlier. The Bloomberg Barclays US Aggregate Bond index returned –4.75% for the quarter.  [Index returns: Bloomberg; bond yields: US Treasury]

For the first half of August, the US stock market seemed poised to continue its advance from its low point of mid-June. Corporate earnings reports were generally good, strength persisted in US employment, and signs continued to gather that inflation may have passed its peak. These favorable factors boosted the market, and the softer inflation measures induced some analysts to conjecture that the Federal Reserve may be nearing the end of its current round of monetary tightening measures. Fed officials apparently took it upon themselves to challenge this last development, with several making public statements to the effect that no, the Fed is not nearly done raising interest rates. The strongest statement, and the one with the sharpest market impact, came from Fed Chair Jerome Powell, who, in brief remarks August 26 from the Kansas City Fed’s annual economic conference at Jackson Hole, Wyoming, made clear that the central bank will not shy away from causing economic pain in its efforts to quell inflation. After he spoke, interest rates jumped, and the stock market fell, more than wiping out any gains from earlier in the month. For the full month, the S&P 500 fell by -4.08%. The selloff was general; the Mid-cap 400 index returned -3.10%, and the Small-cap 600 returned -4.39%. [Index returns: Standard and Poors]

Global stocks also fell, with worries about possible disruptions in European energy supplies this winter due to Russia’s actions a source of particular concern. The MSCI EAFE international equity index returned -2.27% in local currencies. Rising interest rates in the US, persistently low rates in Japan, and relative softness in European economies all contributed to the strength of the US dollar. The US currency rose to end the month at 138.69 yen, from 133.25 at the end of July. The euro fell to $1.0065, nearly at parity with the dollar, from $1.0202 a month earlier. The dollar also ended much stronger against the pound Sterling, at $1.1647 to that unit on August 31, from $1.2183 at the end of July. With the currency effect, EAFE returned -4.75% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]

The messages from Federal Reserve officials reinforced a general upward tendency in US interest rates, and they ended the month sharply higher. The yield on the two-year US Treasury note ended August at 3.45%, from 2.89% at the end of July. The ten-year yield rose to 3.15%, from 2.67% a month earlier. The rise in rates depressed bond prices, and the Bloomberg Barclays US Aggregate Bond index returned -2.83% for the month. [Index returns: Bloomberg; bond yields: US Treasury]

After the difficult first half of 2022, the US equity market bounced sharply higher in July. To some extent, sellers had simply reached a point of exhaustion, easing the downward pressure that had afflicted the market for several months. In addition, corporate earnings reports were generally fairly good, easing fears that a severe economic slowdown might be on the horizon. Other economic indicators remained fairly steady, although consumer prices continued to increase more rapidly than either policymakers or the public would prefer, even as prices of major commodities, most notably oil, fell significantly. Overall, the market seems already to have anticipated quite a bit of negative news, and the absence of further negative surprises – plus a couple of mildly favorable shifts – created the conditions for a rally. The S&P 500 index jumped by +9.22% for July. The rally extended to smaller stocks as well; the Mid-cap 400 index returned +10.85%, and the Small-cap 600 index added +10.01%. [Index returns: Standard and Poors]

Overseas stocks were also generally higher, although not so dramatically as those in the US. The MSCI EAFE international equity index returned +5.19% in local currencies. The US dollar, which had rallied strongly over the past few months, was mixed in July. It slipped to 133.25 yen, from 135.69 yen at the end of June, and weakened slightly, to $1.2183 against the pound Sterling, from $1.2162. The dollar continued to rise against the euro, ending July at a level of $1.0202 against that currency, compared to a level of $1.0469 a month earlier. EAFE returned +4.98% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]

The Federal Reserve, both in its formal releases and in public statements from senior officials, continues to signal its intention to tighten monetary conditions, primarily in an effort to reduce inflation. The major unknown is whether they will be able to subdue inflation without inflicting a severe recession on the US economy. For the most part, the Fed’s signals appear to have been congruent with market expectations, and interest rates actually fell somewhat, particularly at longer maturities. The yield on the two-year US Treasury note ended July at 2.89%, down just a bit from its June 30 level of 2.92%. The ten-year yield fell more sharply, ending the month at 2.67%, compared to 2.98% at the end of June. The Bloomberg Barclays US Aggregate bond index returned +2.44% for the month. [Index return: Bloomberg; bond yields: US Treasury]

The strong market downdraft that began just after the first of the year continued unabated during April, paused in May, and picked up momentum again in June. Analysts cited several factors applying downward pressure on stock prices. While the economic implications of the war in Ukraine remain unclear, it does seem likely to disrupt energy supplies, particularly in Europe. Energy is just one area in which recent price shocks have exacerbated fears of stubbornly elevated inflation. In response, Federal Reserve policymakers continued to make public statements apparently designed to set investor expectations for a rapid tightening of monetary conditions. Market participants largely interpreted these remarks as a signal that economic activity, or at least growth, may slow in coming months, and downrated stocks as a result, punishing high-growth names the most severely. And while the labor market remains unusually tight, and most corporate quarterly earnings reports were fairly good, many of those companies whose results disappointed the markets sold off sharply as well. The market ground lower, the S&P 500 ending with a return of –16.10% for the quarter. Smaller stocks fared nearly as badly: The Mid-cap 400 index returned –15.42%, and the Small-cap 600 index –14.11% [Index returns: Standard and Poors]

For the first six months of 2022, the S&P 500 returned –19.96%, its worst showing for the first half of a year in over half a century. However, as jarring as the rough sledding in the market has been so far this year, its overall effect has been roughly to reverse the gains the major stock indices had posted during 2021, and the S&P 500 index’s current level is about where it was in January of last year.

Global markets also fell, although not quite so sharply as those in the US. The MSCI EAFE international equity index returned –7.83% in local currencies. However, tightening US monetary policy and the war in Ukraine continued to drive the US dollar higher, and with unusual vigor. It rose to 135.63 yen, from 121.44 at the end of March. It also strengthened to $1.0469 against the euro and $1.2162 against the pound Sterling, from levels of $1.1093 and $1.3152, respectively, on March 31. These unusally sharp currency moves worked against US investors in foreign assets. As a result, EAFE had a return of –14.51% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]

The Federal Reserve, both in public statements and in actions, drove interest rates sharply higher. The Federal Open Market Committee raised its federal funds rate target, a key short-term interest rate, by 1.25% during the quarter, and the Committee also initiated a program to reduce the size of its balance sheet. These two steps together represent a significant tightening of monetary conditions, and the increase in market interest rates was the logical – and almost surely intended – response. The yield on the two-year Treasury ended the quarter at 2.92%, up from just 2.28% at the end of March. The ten-year yield ended at 2.98%, up from 2.32% three months earlier. The Bloomberg Barclays US Aggregate Bond index returned –4.69% for the quarter. [Index returns: Bloomberg; bond yields: US Treasury]

Investors hoping for a quick recovery from the market downdraft of the past several months continue to wait. The month of May began with a brief spike upward, reversing a small portion of April’s losses, but the market then spent the next two weeks falling steeply. Employment data continue to be strong, reflecting tightness in the labor market. Corporate results were generally fairly good, but a few high-profile companies’ reports proved disappointing, and investors punished their shares severely. In addition, consumer prices remain stubbornly high, leading many market participants to expect that the Federal Reserve will continue to tighten monetary conditions for some time. These factors all contributed to the market’s drop. By about the 20th, however, enough stocks had fallen far enough to attract some investor interest, and the market recovered its losses, returning to near its starting point for the month. The S&P 500’s return for May was +0.18%, with the largest growth stocks being the laggards for the month. The Mid-cap 400 index returned +0.75% for May, and the Small-cap 600 returned +1.86%. [Index returns: Standard and Poors]

Overall, global markets ended the month not far from their levels for the end of April. The MSCI Barra EAFE international equity index returned -0.20% for May. The US dollar, which had risen dramatically in previous months, eased a bit, ending the month at 127.78 yen, compared to 129.84 at the end of April. It also softened to $1.0774 against the euro and $1.2647 to the pound Sterling, from month-earlier levels of $1.0537 and $1.2565, respectively. The currency effect improved the US dollar return of the EAFE index to +0.75%. [Index returns: MSCI; currency rates: Federal Reserve H.10 release and Yahoo! Finance]

Despite a consistent message from Federal Reserve officials pointing to higher interest rates in the future, investors seemed to move cautiously into the bond market during May, pushing bond yields a little lower. The 2-year US Treasury ended the month at a yield of 2.53%, compared to 2.70% at the end of April. The ten-year yield also inched lower, ending May at 2.85%, down from 2.89% a month earlier. The Bloomberg Barclays US Aggregate bond index returned +0.64% for the month. [Index returns: Bloomberg; Treasury yields: US Treasury]

April was a cruel month in the markets. The market downdraft that had paused during March resumed, and with renewed vigor. Several factors combined to work against investors during the month. The economic implications of the war in Ukraine remain unclear. Federal Reserve policymakers continued to make public statements apparently designed to set investor expectations for a rapid tightening of monetary conditions in response to concerns that recent price shocks throughout the economy threaten to give way to persistent inflation. Market participants largely interpreted these remarks as a signal that economic activity, or at least growth, may slow in coming months, and downrated stocks as a result, punishing high-growth names the most severely. And while most corporate quarterly earnings reports were fairly good, many of those companies whose results disappointed the markets sold off sharply as well. For the month, the S&P 500 returned a startling -8.72%. The Mid-cap 400 index lost -7.11%, and the Small-cap 600 -7.81%. [Index returns: Standard and Poors]

While global markets were soft, they were generally not so weak as the US market. The MSCI Barra EAFE international equity index returned -1.39% in local currencies. However, the expectations for tighter US monetary conditions and higher US interest rates drove the value of the US dollar sharply higher. The dollar rose to 129.84 yen at the end of April, from 121.44 a month earlier. It also strengthened to $1.0537 against the euro and $1.2565 against the pound Sterling, from March 31 levels of $1.1093 and $1.3152, respectively. These unusually large currency moves worked against US investors owning overseas assets, and EAFE returned -6.47% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]

Interest rates also moved dramatically higher during the month. The two-year US Treasury note ended April at a yield of 2.70%, up from 2.28% at the end of March. Over the same interval, the ten-year yield rose to 2.89%, from 2.32%. Reflecting this large move in rates, the Bloomberg Barclays US Aggregate bond index fell by -3.79%. [Index returns: Bloomberg; Treasury yields: US Treasury]

After showing strength for the first few days of January, the US equity market reversed direction, falling sharply for the next several weeks. In January, a soft employment report (subsequently revised higher), an elevated inflation figure, and a stalled effort in Congress to enact a public investment measure combined to sow doubt about the near-term prospects for the US economy. The immediate worry is that persistent inflation may force the Federal Reserve to tighten monetary policy just as the economic recovery from the most severe of the pandemic-related shutdowns may be losing steam. Corporate earnings and subsequent employment figures were generally favorable, but recent increases in prices, both of basic commodities and of consumer goods, reinforced worries of stubborn inflation, requiring an energetic monetary response. Meanwhile, just as the recent surge of Covid-19 infections was abating, Russian President Vladimir Putin gave increasingly menacing voice to his revanchism, adding geopolitical tension to the mix of market worries. When Russian forces finally did invade Ukraine, however, the market rebounded rather sharply, and when the Federal Open Market Committee announced its first increase to the Federal Funds rate since before the pandemic, markets took the matter in stride. Still, the S&P 500 index fell by ¬–4.60% for the full quarter. The Mid-cap 400 index returned –4.88%, and the Small-cap 600 –5.62%. [Index returns: Standard and Poors]

Global markets performed similarly to those in the US, as the MSCI EAFE international equity index returned –3.73% in local currencies. Tightening US monetary policy and the war in Ukraine boosted the US dollar. It rose to 121.44 yen, from 115.17 at the end of December. It also strengthened to $1.1093 against the euro and $1.3152 against the pound Sterling, from levels of $1.1318 and $1.3500, respectively on December 31. EAFE returned –5.91% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]

Expectations of aggressive movements by the Fed led to an unusually sharp rise in interest rates, especially at shorter maturities. The yield on the two-year Treasury ended the quarter at 2.28%, up from just 0.73% at the end of December. The ten-year yield ended at 2.32%, up from 1.52% three months earlier. The Bloomberg Barclays US Aggregate Bond index returned a startling –5.93% for the quarter. [Index returns: Bloomberg; bond yields: US Treasury]

The US equity market continued its recent uncomfortable pattern of volatility around a generally downward trend during February. Economic indicators, particularly regarding employment, were generally favorable, but many market participants have become increasingly concerned that recent increases in prices, both of basic commodities and of consumer goods, may yield to a pattern of stubborn inflation, requiring an energetic monetary response. Meanwhile, just as the recent surge of Covid-19 infections was abating, Russian President Vladimir Putin gave increasingly menacing voice to his revanchism, adding geopolitical tension to the mix of market worries. When Russian forces finally did invade Ukraine, however, the market rebounded rather sharply. Even so, for the full month the S&P 500 index returned -2.99%, with particularly severe losses among the largest growth stocks. The Mid-cap 400 index actually advanced, adding +1.11%. The Small-cap 600 also rose, adding +1.40%. [Index returns: Standard and Poors]

International stocks were also weak; the MSCI EAFE international equity index returned -1.77% in local currencies. Currency movements were not a major factor among the developed markets, in spite of the widely-reported collapse in value of the Russian ruble. The US dollar ended February at levels of 115.11 yen, $1.1224 per euro, and $1.3419 per pound Sterling, not much different from its month-earlier levels of 115.22 yen, $1.1212/euro, and $1.3439/pound. EAFE returned -1.77% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]

While the Russian invasion of Ukraine pushed both Covid-19 and the Federal Reserve out of the headlines, most market participants continue to expect the Fed to begin raising short-term interest rates at its upcoming March meeting. Perhaps in anticipation, interest rates rose, especially at shorter maturities, resulting in a flattening of the yield curve. The yield on the two-year US Treasury note ended February at 1.48%, up from 1.18% at the end of January. The ten-year Treasury yield ended the month at 1.83%, a slight increase from its January 31 level of 1.79%. The Bloomberg Barclays US Aggregate bond index returned -1.12% for the month. [Index returns: Bloomberg; Treasury yields: US Treasury]

The US stock market began the year seeming to show continuing strength, but just a few days in it turned sharply lower, as a soft employment report (subsequently revised higher), an elevated figure inflation figure, and a stalled effort in Congress to enact a public investment measure combined to sow doubt among some market participants about the near-term prospects for the US economy. The immediate worry is that persistent inflation may force the Federal Reserve to tighten monetary policy just as the economic recovery from the most severe of the pandemic-related shutdowns may be losing steam. As January progressed, markets continued to slide, but as listed corporations began making their earnings reports, those fears eased somewhat, and the market bounced sharply in the final few days of the month. Nevertheless, the S&P 500 index fell, returning -5.17% for the month, and smaller stocks fared still worse. The Mid-cap 400 index returned -7.21%, and the Small-cap 600 -7.27%. [Index returns: Standard and Poors]

Overseas markets also fell. The MSCI EAFE international equity index returned -3.64% in local currencies. The US dollar strengthened somewhat, largely on the prospect of less accommodative monetary policy from the Fed. The dollar ended January at 115.22 yen, up slightly from 115.17 a month earlier. It strengthened somewhat more against European currencies, ending January at levels of $1.1212 to the euro and $1.3439 to the pound Sterling, compared to levels of $1.1318 and $1.3500, respectively, at the end of December. With the currency movements, EAFE returned -4.83% in US dollars. [Index returns: MSCI; Currency rates: Federal Reserve H.10 release]

The general expectation of an upward shift in policy rates from the Fed drove market interest rates higher. The two-year US Treasury note yielded 1.18% at the end of January, up from 0.73% at the end of December. The ten-year yield rose to 1.79% at January 31, from 1.52% a month earlier. Higher interest rates correspond to lower bond prices, and the Bloomberg Barclays US Aggregate Bond index returned -2.15% for the month. [Index returns: Bloomberg; Treasury yields: US Treasury]