Another Challenging Quarter
Selling pressure in global capital markets continued during the second quarter of 2022, allowing for the Standard and Poor’s (S&P) 500 to register a -20% return for the first half of the year, and bonds as measured by Barclays US aggregate bond index, to be down over 10% during the same time span.
Adding to investor anxiety was the high correlation of negative price movements across traditionally low correlated asset classes. Bonds are typically about 20% as volatile as equities, yet this year we have seen that figure more than double. This creates fear for investors in traditionally diversified portfolios.
The conditions witnessed over the past few years which have aided risk assets have given way to a myriad of challenges and uncertainties. This year has seen the emergence of rampant inflation, concerns over US Federal Reserve (Fed) policy, questions regarding economic growth, and of course the Russia/Ukraine conflict.
All these issues are interrelated; including the zero-tolerance COVID-19 policies in China and their impact on global growth prospects. This dynamic has perhaps been under-appreciated as a destabilizing force in the global economic picture. When the world’s second-largest economy effectively shuts down economic activity in response to any COVID-19 outbreak, the stifling impact to economic activity is more than significant.