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U.S. equities and bonds ended a volatile August lower as investors came to grips with increased rate-hike expectations after global central banks vowed to step up their wars against inflation. In a classic tale of two halves, the S&P 500 had advanced over 4% through August 16 amid continued hopes that the Federal Reserve would signal an early dovish pivot away from aggressive rate hikes on indications of peaking inflation. However, the S&P 500 sold off over 8% during the second half of the month as the central bank resolved to stay hawkish, even at the expense of a potential growth slowdown.
All three major U.S. equity indices posted their worst returns since June and their largest August losses since 2015. Moreover, from stocks to bonds to commodities, virtually every asset class slid, having the largest unified cross-asset monthly drop since December 1981. Individual asset classes had larger historical losses such as the approximate 12.5% pandemic-related loss on the S&P 500 in March of 2020, so this 4% loss pales in comparison. Overall, the S&P 500 has given back around half of its summer relief-rally that began in mid-June.
Corporate earnings continued to roll in better than feared with strong profit margins suggesting higher prices charged by businesses are outpacing their increased costs of production and labor. Aggregate after-tax profit margins for non-financial corporations improved in the 2Q to 15.5%, the most since 1950, from 14% in the first quarter.
In August, all equity styles of companies posted negative returns for the month and year-to-date. Growth-oriented companies did post deeper August losses in Large and Mid Caps, while the reverse was true in Small Caps with larger losses in Value. Value continues to outperform on a YTD basis. Growth is negatively correlated to rising interest rates, as future expected profits decline in present value calculations.
Style Box Index returns above are represented by: Large Value (Russell 1000 Value), Large Core (Russell 1000), Large Growth (Russell 1000 Growth), Mid Value (Russell Mid Cap Value), Mid Core (Russell Mid Cap), Mid Growth (Russell Mid Cap Growth), Small Value (Russell 2000 Value), Small Core (Russell 2000), Small Growth (Russell 2000 Growth). Source: Morningstar Direct, total return based, including reinvested dividends.
In sector performance, of the 11 major groups only two of the three defensive-oriented sectors posted August gains, led by the continued dominance of Energy. Energy and Utilities extended YTD gains, while Consumer Staples deepened their 2022 losses. Technology was the largest detractor to August performance, while Consumer Discretionary and Communication Services are down the most so far this year.
Foreign equity markets were mixed in August, with the MSCI EAFE Index (representing developed markets outside of the U.S. and Canada) having a 0.67% greater loss relative to the S&P 500. Japan had among the smallest losses in developed markets, down 2.55%, while the United Kingdom (-6.37%) and the European region (-6.23%) declined the most. Emerging markets outperformed (+0.42%), climbing fractionally, with a strong August in Brazil (+6.40%) and India (+4.11%). Gains were mostly offset by declines in Mexico (-5.00%) and South Korea (-3.32%). China rose 0.22%.
Turning to fixed income markets, Treasuries ended August with the yield on 10-year Treasury notes at 3.13% while the two-year Treasury yield finished at 3.49%, its highest since 2007. On a broader basis, investment-grade bonds fell by 2.83%. Bloomberg’s U.S. High Yield Bond Index, representing holdings of below investment-grade (junk-rated) corporate bonds, fell 2.30% last month. Municipal bonds outperformed the U.S. Aggregate Bond benchmark index, falling a lesser 2.19%.
This report is created by Cetera Investment Management LLC. For more insights and information from the team, follow @CeteraIM on Twitter.
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The Bloomberg Barclays Capital U.S. Aggregate Bond Index, is a broad based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government–related and corporate debt securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency) debt securities that are rated at least Baa3 by Moody’s and BBB- by S&P. Taxable municipals, including Build America bonds and a small amount of foreign bonds traded in U.S. markets are also included.
The Bloomberg Barclays US Municipal Bond Index covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and prerefunded bonds. Eligible securities must be rated investment grade (Baa3/BBB- or higher) by Moody’s and S&P and have at least one year until final maturity, but in practice the index holding have a fluctuating average life of around 12.8 years.
The Bloomberg Barclays US Corporate High Yield Index measures the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below, excluding emerging market debt. Payment-in-kind and bonds with predetermined step-up coupon provisions are also included. Eligible securities must have at least one year until final maturity, but in practice the index holdings has a fluctuating average life of around 6.3 years.
The Barclays U.S. Government Bond Index is comprised of the U.S. Treasury and U.S. Agency Indices. The index includes U.S. dollar-denominated, fixed-rate, nominal US Treasuries and US agency debentures (securities issued by US government owned or government sponsored entities, and debt explicitly guaranteed by the US government).
The Bloomberg Commodity Index is a broadly diversified index that allows investors to track commodity futures through a single, simple measure. It is composed of futures contracts on physical commodities and is designed to minimize concentration in any one commodity or sector. It currently includes 19 commodity futures in five groups. No one commodity can comprise less than 2% or more than 15% of the index, and no group can represent more than 33% of the index (as of the annual reweightings of the components).
The Cboe Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices.
The MSCI EAFE is designed to measure the equity market performance of developed markets (Europe, Australasia, Far East) excluding the U.S. and Canada. The Index is market-capitalization weighted.
The MSCI Emerging Markets is designed to measure equity market performance in global emerging markets. It is a float-adjusted market capitalization index.
The MSCI All-Country World Index (ACWI) is a market cap weighted index designed to represent performance of the full opportunity set of large- and mid-cap stocks across 23 developed and 26 emerging markets, covering more than 2,700 companies across 11 sectors and approximately 85% of the free float-adjusted market capitalization in each market.
The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth values.
The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 Index companies with lower price-to-book ratios and lower forecasted growth values.
The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe and is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.
The Russell 3000 Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market.
The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe and is a subset of the Russell 1000 Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap represents approximately 31% of the total market capitalization of the Russell 1000 companies.
The S&P BSE SENSEX Index is a free-float market-weighted index of 30 well-established and financially sound stocks on the Bombay Stock Exchange, representative of various industrial sectors of the Indian economy.
The S&P 500 is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ.
The NASDAQ Composite Index includes all domestic and international based common type stocks listed on The NASDAQ Stock Market. The NASDAQ Composite Index is a broad-based capitalization-weighted index.
The Shanghai Composite Index is a stock market index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange.
The U.S. Dollar Index is a weighted geometric mean that provides a value measure of the United States dollar relative to a basket of major foreign currencies. The index, often carrying a USDX or DXY moniker, started in March 1973, beginning with a value of the U.S. Dollar Index at 100.000. It has since reached a February 1985 high of 164.720, and has been as low as 70.698 in March 2008.
West Texas Intermediate (WTI) is a crude oil stream produced in Texas and southern Oklahoma which serves as a reference or "marker" for pricing a number of other crude streams. WTI is the underlying commodity of the New York Mercantile Exchange's oil futures contracts.