20 Jul 2022
The known knowns are enough, thanks
As we say goodbye to a quarter that we’d all rather forget, capital markets are demonstrating their resilience. Through the 18th, every asset class that we model, apart from emerging market equities, is in positive territory, and that’s before considering the impact of the major rally that is occurring as I’m writing this. While there is no shortage of issues to be concerned about, investors are fully aware of the dangers, and the markets, as we all know, actively discount the probability of those negative events. Even as U.S. GDP (Gross Domestic Product) estimates continue to fall, earnings estimates likewise are revised downward (albeit at what seems too slow of a pace), and the strength of the dollar continues to put pressure on many foreign economies, for the moment, investors are likely being rewarded for taking risk.
Since January, economists have reduced their GDP estimates for 2022 from about 3.25% to approximately 0.75%, and they’ve taken down 2023 growth numbers from close to 2.5% to just over 1%.
The yield curve is now at its most inverted point since 2000, echoing, or perhaps contributing to, the negative GDP revisions.
And consumers, despite seeing larger paychecks, are falling further behind as inflation takes its pound of flesh.
Capital markets do discount all that’s known, and everything above is surely known, so the fact that almost all asset classes are in positive territory month-to-date should provide solace to investors. But, in general, fund managers as a group aren’t quite there yet, or maybe they don’t believe that investors are quite there yet, and as such, fund managers should plan for additional withdrawals. Because according to BofA’s Global Fund Manager Survey, the percentage of managers who indicate that they are taking higher than normal risk is at its lowest level since 2008, and cash levels are at their highest since 2001.
As for what exactly has transpired month-to-date, it’s essentially been a tempered reversal of the second quarter, at least for equities. Growth stocks, domestic (+2.4%) and international (+2.1%), both large and small, have bested their value peers, while emerging market equities, which had been the best performing equity class during the second quarter have fallen to the bottom, returning -1.7%. In the bond markets, high yield has surged, gaining 2.3%, with leveraged loans (+1.5%), and investment grade corporates (+1%) also performing relatively well. Almost all fixed income categories that we utilize directly are up for the month, even as the yield on the 10-year has moved upward by a couple of basis points.
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| ASSET CLASS | INDEX | INDEX DESCRIPTION |
| U.S. Stocks | Russell 3000 | Measures the performance of the entire U.S stock market. |
| International Developed Equity | MSCI EAFE | An equity index which captures large and mid cap representation across 21 Developed Markets countries around the world, excluding the U.S. and Canada. |
| Emerging Market Equity | MSCI Emerging Markets | An Index that captures large and mid cap representation across 27 Emerging Markets (EM) countries |
| Investment Grade Corporates | Bloomberg Barclays U.S. Corporate OAS | Represents the Option-Adjusted Spread (OAS) of the Bloomberg Barclays U.S. Corporate Index, which measures the investment grade, fixed-rate, taxable corporate bond market. |
| High Yield Debt | Bloomberg US Corporate High Yield | Measures the USD-denominated, high yield, fixed-rate corporate bond market. |
| Leveraged Loans | S&P / LSTA U.S. Leveraged Loan 100 | Designed to reflect the performance of the largest facilities in the leveraged loan market. |
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