August 2022 Market Commentary: Jackson Hole Raises the Cost of Monkey Business

Benjamin M. Lavine, CFA, CAIA, RICP
Chief Investment Officer, 3D

Data Source: Bloomberg

To read full commentary, click here.

August 2022 Highlights:

  • The global equity market rally that began in July continued throughout the first half of August but then sharply reversed into and following the month-end Jackson Hole symposium. In August, the MSCI All-Country World Index (ACWI) returned -3.7%.
  • Across major regions, Emerging Markets and broader Asia outperformed the U.S. and Europe. In August, MSCI Emerging Markets returned 0.4% and MSCI Pacific ex-Japan returned -0.2% followed by MSCI Japan (-2.6%), the S&P 500 (-4.1%) and MSCI Europe (-6.2%). China helped lead the recovery in Asia despite its own domestic concerns, while key Asian markets such as South Korea and Taiwan are experiencing slower export growth and depreciating currencies.
  • Within the U.S., U.S. smalls caps marginally underperformed large caps yet not as much as one would have been expected with the risk-off tone, while value stocks outperformed growth stocks, as large cap technology stocks drove growth’s underperformance. The S&P 500 Index returned -4.1% versus -4.4% for the S&P 600. S&P Pure Value outperformed Pure Growth, returning -1.4% versus -4.4%.
  • Across sectors, Energy outperformed although some of this leadership was surrendered towards month end with the pullback in commodity prices while defensive sectors such as Utilities and Consumer Staples also outperformed the broader market as did traditional value sectors such as Financials and Industrials. Real Estate, Health Care, and Technology sectors underperformed the market.
  • August was a better month for relative performance of major risk factors versus the broader market versus July. Only High Quality underperformed the broader market while Momentum led all other factors.
  • Investment grade fixed income sold off towards the end of the month following the Jackson Hole symposium as interest rates rose to the high end of this year’s levels as the Fed remains committed on its rate hike campaign to fight inflationary pressures. The 10-Year U.S. Treasury Yield rose from 2.6% at the beginning of August to 3.2% at month-end while and corporate credit spreads widened but remain lower than the mid-June stress levels. The Bloomberg U.S. Aggregate Bond Index returned -2.8% for the month, hurt by both a rise in rates and wider credit spreads. Non-U.S. bonds underperformed due to U.S. dollar strength and higher yields as the Global Aggregate ex US Index returned -5.0%.
  • Despite wider credit spreads, U.S. high yield marginally outperformed the broader fixed income market benefiting from lower duration exposure. The Bloomberg US High Yield Index returned -2.3%, while Bloomberg/Barclays Emerging Market Debt LC returned +0.5% despite local currency weakness as yields did not rise as much versus developed markets.
  • Within equity alternatives, S&P GSCI Commodities Index returned -2.7%, having turned negative following the Jackson Hole symposium. The S&P GSCI Precious Metals Index dropped 3.7%, as higher real interest rates weigh on gold prices. The Dow Jones REITs Index returned -5.9%, hurt by equity market volatility and higher interest rates.
  • The upshot of the current challenges posed by high inflation, tightening central bank policies, food and energy shortages, and geopolitical tensions is a higher likelihood that much of the world will experience a post-pandemic recession induced by demand destruction. Growth recession does not sound like an appealing prospect, but it may have to suffice as opposed to the alternative. Cross-asset valuations reflect this less-than-appetizing prospect of higher real rates and lower top line growth and profitability but not a total shutdown. Meme stock monkey business may be harder to come by under a more financially constrained regime.

To read full commentary, click here.