Market Commentary: June 2022

It’s official: the S&P 500 is now in a bear market, joining its peer, the Nasdaq 100. Recovery is inevitable, but what do recoveries typically look like?

Since 1950, S&P 500 bear markets have taken an average of 154 days (or 5 months) to find a bottom. On average, the market has returned 14.8% 12 months later, showing clear reasons for long-term optimism. In fact, the recovery from the last S&P 500 bear market (in 2020) was the strongest yet, with the index up by 59% in the 12 months following.[1]

Market Performance

Perhaps the most surprising performance (year to date) has come from a defensive area of the market: Fixed Income.

Source: FE Fund Info – 16/06/2022

UK Gilts and UK Index-Linked Gilts have broadly tracked developed equity markets this year, with the Index-Linked Gilt sector falling by 20.97% – even further than the S&P 500 – and with similar volatility to the American Equity index. Although the asset class implies that it benefits from tracking an inflation-linked index, it is the income paid by the bond (rather than capital value), that benefits from such.

As the sector is largely comprised of interest rate sensitive ‘long-duration’ bonds, it has experienced a large-scale selloff over the last month, driven by the Bank of England’s decision to increase the UK Interest rate to 1.25%; the highest level for 13 years[2].

The FTSE 100 is having its ‘day in the sun’ and remains relatively unscathed on a year-to-date basis, with the commodity-heavy Index directly benefitting from rising commodity prices. Viewing the index through a broader lens gives much better perspective, with it largely lagging senior developed market peers for lengthy periods of time.

Central bank policy

Important notes emerged from the minutes of the Bank of England Monetary Policy Committee meeting on 15^th June 2022, where 3 policy makers voted to increase the bank rate even further than the majority (to 1.50%) and the committee stated that it will “if necessary, act forcefully” in response to global inflationary pressure. The committee signalled that UK inflation would rise above 11% in October of this year, suggesting further headroom to raise interest rates in the coming months.

Rising rates continue to be a key theme across developed markets, each of which are working to counter rising inflation. Inflation itself continues to be driven by the previous decade of quantitative easing, the release of pent-up demand (driven by Covid-19 lockdowns) and by the war in Ukraine, which has driven up the price of many agricultural commodities, owing to supply chain disruption.

Since inflationary pressures are a global issue, the outlook for the US remains broadly similar to the UK, with the US Federal reserve increasing its bank rate by 0.75% during its June meeting, the biggest increase since 1994.[3]

As a result, equity market volatility remains stubbornly high, currently measuring at 31.41 after starting the year at just 16.61, an 89% increase YTD.[4]

Recovery is inevitable as market valuations become more attractive. The real question is; when?

[1] LPL Research/Factset – 20/05/22

[2] Bank of England – 16/06/22

[3] US Federal Reserve – 15/06/22

[4] Tradingview.com – 16/06/22

Meet The Author:

Anthony Walters provides ongoing support for partner firms, performing quantitative analysis on investment processes within our CleverAdviser service. He is also a member of the Clever R&D team, continually working to develop and refine our quantitative investment strategy.

Anthony holds the Investment Management Certificate (IMC), CFA UK certificate in ESG investing, and Diploma in Regulated Financial Planning (DipPFS). He is a CFA level I candidate.

This financial market commentary is for the week commencing Monday 20th June 2022.