July 2022 Market Commentary: Recession or Inflation? It Depends

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

Data Source: Bloomberg

To read full commentary, click here.

July 2022 Highlights:

  • Following a weak 1st half 2022, global stocks rallied sharply in July, particularly the last week following the Fed July meeting. S. company earnings are coming in better than initially feared and the market’s perception of a Fed pivot from its rate hike campaigns put a strong risk bid underneath equities and other risk assets such as high yield credit and commodities. In July, the MSCI All-Country World Index (ACWI) returned 7.0%.
  • Across major regions, the S&P 500 returned 9.2%, well above the other major regions. MSCI Japan and MSCI Europe outperformed emerging markets and broader Asia Pacific, returning 5.7% and 4.9%, respectively. MSCI Emerging Markets (-0.2%) and MSCI Asia ex-Japan (0%) were flat to negative for July. After performing well in the 2nd quarter, China dragged down emerging markets, with MSCI China Index returning -9.5% as financial problems persist across the country’s property sector.
  • Within the U.S., U.S. smalls caps marginally outperformed large caps, while value stocks underperformed growth stocks, as a handful of large cap technology stocks drove growth’s outperformance. The S&P 600 Index returned 10.0% versus the 9.2% for the S&P 500. S&P Pure Value underperformed Pure Growth, returning 4.6% versus 12.9%.
  • Growth sectors with top-heavy technology stocks, such as Consumer Discretionary and Technology, outperformed Defensive sectors such as Utilities and Consumer Staples. Energy and Industrial sectors also marginally outperformed the broader U.S. market.
  • None of the major risk factors outperformed the broader market in July. Among risk factors, High Quality barely kept pace with the broader market while High Dividend was the worst relative performer. Value, Momentum, and Minimum Volatility performed in line with each other.
  • Investment grade fixed income rallied towards the end of the month as interest rates dropped following the Fed July meeting and indications of a weakening global economy. The 10-Year U.S. Treasury Yield dropped to 2.6% from 3.0% at the beginning of July and corporate credit spreads continue to narrow from the mid-June stress levels. The Bloomberg U.S. Aggregate Bond Index returned 2.4% for the month, benefiting from both a drop in rates and narrower credit spreads. Non-U.S. bonds underperformed due to U.S. dollar strength as the Global Aggregate ex US Index returned 1.9%.
  • S. high yield marginally outperformed the broader fixed income market benefiting from positive equity market performance. The Bloomberg US High Yield Index returned 5.9%, while Bloomberg/Barclays Emerging Market Debt LC returned -0.1% hurt by currency weakness.
  • Within equity alternatives, S&P GSCI Commodities Index returned 0.0%, recovering from a steep sell-off that began in June. Oil prices remain elevated trading around $95-$100/barrel as traders weigh ongoing supply constraints with signs of decreasing demand. The S&P GSCI Precious Metals dropped 2.2%, but the precious metals complex rallied following the Fed July meeting. The Dow Jones REITs Index returned 8.5%, benefiting from the U.S. equity market advance.
  • The upcoming payroll releases, inflation reports, August Jackson Hole Federal Reserve confab, fiscal spending legislation, not to mention geopolitics (Russia/Ukraine, China/Taiwan) will likely serve as headline contributors to market volatility in the months ahead as we move past the 2nd quarter earnings season (although major retailers have yet to report aside from Wal-Mart’s pre-announcement in mid-July). Yet, this month’s rally in U.S. equities and bonds has driven up valuations to leave a little less room for error should more negative surprises surface that would derail the ‘soft landing’ narrative and the Fed’s pivot.

To read full commentary, click here.