- The economy slowed more than expected, and hot inflation remains sticky.
- Tightening financial conditions, a slowing economy, political turmoil, and poor consumer sentiment are a volatile mix.
- The market shake-up repriced assets and presents opportunities for bargain hunters.
The second quarter was ugly as investors learned there is no good place to hide when inflation takes hold
With its inflation-fighting credentials in question, the Federal Reserve (Fed) got serious, setting the stage for a tightening cycle at the same time the economy is already slowing. Investors are hoping for the best but preparing for the worst as recession worries emerge. However, the shake-up presents opportunities for bargain hunters to find value, and fixed income ended the quarter offering yields that are quite interesting.
Markets were highly volatile, stocks entered a bear market, and fixed income did not provide a safe haven as all major asset classes ended in the red. Commodities, one of the few asset classes to benefit from inflation, continued to be the best performer of the year, but even that asset class struggled in the quarter as growth concerns grew. After the big move in rates in the first quarter, treasury yields continued their rise across the curve, reaching nearly 3.5% in mid-June. From 2-10 years, treasury rates ended the quarter clustered around 3% as the curve shifted approximately 50-60 basis points (bp) during the quarter. Spreads widened and, along with higher rates, yields rose to a more attractive level than seen in some time. The Bloomberg Corporate Index now yields 4.70% (the highest level since 2009) and the Bloomberg High Yield Index ended the period at 8.89%, providing new alternatives for yield-hungry investors. The S&P 500® total return index lost 16.1% over Q2 and finished the second quarter in bear market territory. The growth-oriented NASDAQ’s total return was even worse, ending the quarter down almost 30% YTD. Despite terrible performance across the board, the slide was orderly, without the panic selling that investors fear.