By: Stash Graham
Stocks fell again in June as the benchmark S&P 500 closed out its worst first-half performance in fifty-two years.
The benchmark index ended the first half of the year with a thud losing more than -8% during June and more than -16% during the second quarter. The S&P 500 is down -21% year-to-date, the worst since 1970, as markets continue to adjust to a new reality of a Federal Reserve whose monetary policy is not to prop up the stock market but to fight inflation. The tech-heavy NASDAQ was down almost -9% for the month, lost more than -22% for the second quarter, and nearly -30% year-to-date. As interest rates continued to rise throughout the month, long-duration stocks, commonly found in the technology sector, felt sustained downside pressure on their valuations. The -30% loss is the worst performance from the NASDAQ since the Dotcom bubble of 2002. In the fixed-income world, we saw further downside as the world’s largest investment-grade corporate bond ETF (ticker: LQD) lost more than -4% in June and is down -17% year-to-date. Precious metal gold was down more than -2% on the month and is down -1.4% year-to-date. June represented the first month where our assets experienced downside pressure. We are pleased to write that our relative outperformance to the major equity indices and popular fixed-income funds grew materially in the last month and continued to widen so far to start this year.
The market sell-off was broad-based as market participants tried to grasp the direction of the U.S. economy at a time when the Federal Reserve continued to take away support from financial asset prices. During the June meeting, the Federal Reserve decided to raise the Fed Funds rate range by 75 basis points. Additionally, they continue to guide for more multi-rate hikes at upcoming meetings for the remainder of the year. Consequently, we have seen a material rise in corporate bond yields as these rates move higher with U.S. Treasury interest rates. Suppose corporate bond interest rates continue to climb. In that case, we expect management teams to adjust capital management priorities away from rewarding shareholders (buying back stock, paying cash dividends, etc.) to paying down their debt obligations. Secondarily, as interest rates rise, risk-averse investors might look to divest their equity positions for corporate bonds that suddenly look attractive again after years of painfully low-interest rates.
As the Federal Reserve continues to make cash more expensive, participants are still trying to fine-tune their projections for the near-term future of the United States economy. As supply-side related constraints exacerbate price pressures in commonly purchased commodities like gasoline, concerns about the spending power of the American household are coming to the forefront. After spending their excess savings from 2020, consumers are increasingly changing their consumption plans and how they are paying for them. Credit card usage has increased each month and bears monitoring as history has guided us that excessively spending on your credit card ends poorly. If a borrower gets behind on being able to pay their bill completely, the standard 20+% APR rates are much higher than the rates that income and wealth grow for the typical household. In the previous client video call, we highlighted that borrowers are keeping current with their debt obligations at a historically high rate (97.3%) through the first quarter of 2022 (Source: New York Fed). We monitor the rate of change in delinquency rates to indicate when consumers could start to pull back from purchasing goods and services, which would put immense pressure on the U.S. economy and probably lead to an economic recession.
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