The increase in volatility and macroeconomic uncertainty led to a significant devaluation of the equity market. The S&P 500 Index recorded seven weeks of negative returns (ending May 20), an unusual event that last occurred 21 years ago in March 2001.
By the end of the third week of May, the SPX was flirting with bear market territory, with year-to-date performance crossing the -20% threshold, before recovering slightly.
Yet, despite a series of negative macroeconomic imprints in the week ending May 27, the equity market rallied strongly, with the S&P 500 posting one of the strongest gains on record. The total return of 6.6% for the week was the 19th highest return since 1950.
The economic context has changed significantly since the beginning of the year. At the time, the market expected economic growth to be moderate to above trend (above trend, growth above 2%) for major economies. This followed the abnormal growth reported in 2021, which was mainly due to the reopening of economies after the pandemic.
The positive outlook for 2022 took into account an improvement in supply-side constraints, which would ease inflation fears. However, inflation remained elevated for longer than initially expected as pent-up economies supported consumer demand while supply came under pressure from the March invasion of Ukraine and the zero-case policy. of China (which led to several city closures in the country in April). ).
This meant we had come full circle from reflation trade for much of 2021, to stagflation concerns in late 2021/early 2022 to recession fears today.
We looked at the biggest market moves in 2022 and tried to understand the key performance drivers. We have identified four periods when stock market movements have been significant for global equities: (1) 12/01 to 27/01 – the MSCI World Index (MXWO) fell 12.0% in just 15 days; (2) 09/02 – 10/03 – MXWO down 17.1%; (3) 3/14 to 3/29 – the S&P 500 rebounded 11.0%; and (4) 3/30-5/20 – the S&P 500 fell 15.9%. This should provide a good insight into how investor sentiment evolves throughout the year.
The economic context has changed significantly since the beginning of the year.-Robert Ducker
Period 1: The sell-off in global equities in period 1 was driven by anticipation of tighter monetary policy than initially expected and weakening global growth expectations. The main concern here was the mix between growth (weaker) and inflation (higher). U.S. interest rate expectations for 2022 have risen from zero hikes expected in the summer of 2021 to around seven in January, leading investors to start pricing in the potential for stagflation.
Period 2: The second phase captures the growing tensions between Russia and Ukraine that ultimately led to the invasion of Ukraine. Global growth expectations had started to pick up in February but peaked on 09/02, when news flow around Russia and Ukraine deteriorated. During this period, the main driver of equity market performance was the downward revision of global growth expectations, mainly due to the impact of the war on energy supply and prices. Above all, during this period, monetary policy expectations remained largely unchanged.
Period 3: The relief rally that followed was a mix of improving growth expectations and expectations that the tightening cycle would be interrupted by war. Historically, investors have expected a much worse outcome for stocks before/during a war, which has typically led to a sharp decline followed by a strong rally. This was the case during the invasion of Ukraine.
The expectation at this point was that the war would end quickly and the impact on global economic growth would be limited. Curiously, global growth expectations rose to a year high (and highest since November 2021) despite the ongoing war in Ukraine, suggesting that optimism was too high.
Period 4: The expectation that the invasion of Ukraine would be short did not materialize, with the war continuing to this day. Inflation impressions remained elevated, higher than they have been in decades. Rising prices (inflation) implies that demand is greater than supply, and so the rationale for raising rates is to cap demand.
However, trying to control inflation could have serious consequences for economic growth. Weakening demand without entering a recession is a delicate balance to strike and investors are well aware of this. The narrative in April and May shifted from stagflation to the potential for a recession.
The information presented in this commentary is provided for informational purposes only and is not be interpreted as investment advice, or be used or considered as an offer or solicitation to sell/purchase or subscribe to financial instruments, nor constitute advice or a recommendation concerning these financial instruments. Curmi and Partners Ltd is a member of the Malta Stock Exchange and is authorized by the MFSA to carry on investment services business.
Robert Ducker is an elderly person equity analyst at Curmi and Partners Ltd.
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