For most of the second quarter, financial markets seemed to defy grim economic news, the continued spread of COVID-19, and worldwide protests against racial inequality. Global equities performed strongly for the quarter. The S&P 500 Index gained an incredible 21% and by quarter-end was down only 3% for the year, despite the huge drawdown in March. Developed international and emerging-market stocks gained 17% and 19%, respectively, and outperformed U.S. stocks in late May and June.
However, there is a distinct style (or factor) bifurcation beneath the surface: Growth stocks, as measured by the Russell 1000 Growth Index, outperformed value stocks (Russell 1000 Value index) by a stunning 26 percentage points so far this year. As seen in the United States, growth indexes are meaningfully outperforming value indexes overseas.
Enormous levels of money printing and government spending certainly helped the investor mood. Central banks around the world provided unprecedented support to markets and economies. On the fiscal side in the United States, trillions in direct payments and loans have been or are going to be delivered to impacted citizens and businesses. The level of stimulus globally already surpasses by far what was issued during the 2008 financial crisis.
Short-term interest rates are now near zero or negative in most of the developed world. The 10-year Treasury yield fell slightly this quarter but has revolved around 0.7% for some time. Also, investment-grade corporate bond spreads narrowed. Accordingly, core bonds gained another 3% during the quarter.
Non-core flexible bond funds and floating rate loan funds, which take on more risk than core bonds but have higher expected returns, rebounded strongly from their poor first quarter performance, meaningfully outpacing core bonds this quarter.
Our lower-risk, multi-strategy alternatives fund had a strong quarter gaining 8%, also after a disappointing first quarter. In contrast, trend-following managed futures funds gave back much of their strong positive returns from the first quarter, as many market trends have sharply reversed since March. The varied performance of these investments reflects their beneficial, diversifying roles in a portfolio.
While markets and the economy have rebounded, we should steel ourselves for a potential double-dip, even possibly back down to the late-March market lows, most likely caused by disappointing developments on the virus/medical front. There are also other uncertainties around the November election or the ongoing U.S.-China dispute that could disrupt financial markets. This is why we maintain a healthy allocation to core investment-grade bonds, despite very low yields. They are one of the few investment classes that should appreciate if the economic recovery stalls or faces a setback, along with a number of our alternative strategy investments.
Still, we see several ways for our portfolios to outperform over the next five to 10 years. If a more benign public health scenario plays out, there is a good chance we’ll get a sustainable, albeit uneven, global economic recovery. Along with low interest rates and the monetary and fiscal policy response, this would support the view that equities and fixed-income credit sectors are relatively attractive compared to core bonds. Non-core, flexible, and actively managed bond funds should also do quite well in this event.
Overall, our current portfolio positioning is being implemented in a way that we believe best balances a variety of shorter-term risks against attractive medium- to longer-term return opportunities.
Actions to Take in Uncertain Times
In a volatile environment like the one we find ourselves in today, and experienced just two years ago in 2020, we recognize that some investors feel as though they should make changes in their portfolios—even if just to take action.
Research Update on Market Volatility
Given the renewed market downturn, fed by high uncertainty around inflation and the war in Ukraine, we want to share our most-current views and portfolio positioning with clients and followers of our research.
Commentary from Our CIO—First Quarter 2022
In this commentary, we highlight key developments in the global economy and financial markets. The biggest macro event was Russia’s brutal invasion of Ukraine. As is our job, our focus is on the economic and financial market impact of this event. Clearly, the human impact has been devastating and tragic, and our hearts and support are with the Ukrainian people.