We saw stomach-churning market volatility in the second quarter as stocks and bonds continued to struggle. The market continued to process slowdown concerns and whether or not we have reached peak inflation. A series of economic data numbers hinted at the possibility of easing price pressures, and the Fed announced a 0.75% rate hike while signaling that a subsequent series of 0.75% hikes are likely this summer. The Fed hasn’t hiked rates by 75 bps or more at multiple meetings in a year since the 80’s.
We continue to work to ensure portfolios are properly positioned for successful outcomes over the long term. During the quarter, commodity-backed and hard asset-heavy value stocks continued to outperform. Also, shifting away from growth-oriented and duration-sensitive assets helped returns. The largest detractors to performance were global technology and US small cap stocks and, to a lesser extent, both nominal and inflation-linked US treasuries.
Equities
US Stocks fell further in Q2 after a similarly red first quarter of 2022. The Nasdaq Composite was hurt the worst with a -22.28% decline in the second quarter.

Not a single S&P sector posted a positive return over the course of Q2, each one was in the red. The defensive sectors did hold up best, with Consumer Staples returning -4.19%. After an exceptionally strong Q1 Energy also sank lower, but only by -5.45%. The Technology, Communication Services, and Consumer Discretionary sectors all fell by around 20% or more.

Fixed Income
The second quarter of 2022 brought a lot of action in the yield curve. Treasury Rates continue to rise across the board, and by so much in the short-end that the yield curve has flattened to the point of inversion. An inverted, and flatter, yield curve can indicate uncertainty about economic growth in the long term.
The 5-Year Treasury Rate ended Q2 at 3.01%, greater than the 10-Year Rate’s 2.98% yield and just shy of the 30-Year’s 3.14%. (Update: The 10-2 Year Treasury Yield Spread fell to a 20-year low of -0.22% shortly after the quarter-end.)

Trade Rationale
Mixed economic data, the Fed’s rate hiking cycle, and stock and bond markets that have seemingly already priced in a lot of bad news provide convincing evidence for both bull and bear market arguments.
For these reasons, we continue to de-risk now to be nimble later. Our moves to reduce active risk over the last several rebalances have served us well during this period of market stress, but by further balancing out our value/growth exposures, scaling back our energy and commodities positions, and targeting lower total portfolio volatility, we can seek to insulate the portfolio from the uncertainties of today and be better situated in the future to take on risk as potential opportunities arise.
This commentary is for informational purposes only. Consult with your advisor before making any investment decisions.