U.S. equity markets fell significantly in the quarter. Recession fears and an accelerated Federal Reserve interest rate hike trajectory weighed heavy on markets, leading to the weakest first half performance of the S&P 500 in decades.
European equities and emerging markets (EM) equities also fell in the quarter, although less significantly than U.S. equities. Potential gas shortages, waning consumer confidence, and higher inflation weighed on equity markets. China was the one bright spot in EM equities, ending the quarter in positive territory, as factory activity improved and COVID lockdowns eased.
Amid growing inflation, the Federal Reserve raised the key interest rate twice, 50 basis points in May and 75 basis points in June. Chairman Powell communicated that he is prepared to move more quickly to reduce policy support if supply/demand imbalances and externalities from the Russia/Ukraine war continue to weigh on inflation. The FOMC is prepared to raise interest rates up to 3.25% - 3.5% by year-end. The Fed officially began reducing its balance sheet on June 1st by $47.5 billion a month and will reduce by $95 billion after three months.
The treasury yield curve increased across all maturities, particularly on the short-end, resulting in a relatively flat yield curve. Investment grade (IG) spreads widened by approximately 40 basis points (bps) over the quarter, while high yield (HY) spreads widened by roughly 240 basis points. Bonds are on track for their worst performance in recent history, surpassing the lows of the 1970’s and 1980’s.
Indicators used to measure U.S. economic activity, ISM Manufacturing and Non-Manufacturing indexes, declined over the past three months. As a result, concerns of a slowing economy led commodity prices to weaken towards the end of the quarter. Despite rising mortgage rates, the Case-Shiller Home Price Index remained persistently high as demand for U.S. real estate outpaced supply, albeit a slower pace.
To view the first quarter reports, click on the links below: