By: Russ Kamp, Managing Director, Ryan ALM, Inc.
The first six months of 2022 have come and gone, but not before leaving some destruction in its wake! However, before we dive into the numbers, we want to wish you and yours a wonderful Fourth of July holiday weekend. May we all take a few moments to just catch our collective breath before we embark on what may be a very challenging second half.
Not since 1970 have we had a start to a new year in equities (as measured by the S&P 500’s total return) as that which we’ve experienced so far this year with the index down -19.96% through yesterday’s close. I was 11 at that time in 1970 and very much not focused on how Nixon’s economy and markets were performing. I suspect that most market participants were much younger than that! Unfortunately, there was very little that one could do within equities to avoid these challenging 2022 results, as the Russell 2000 (small cap) underperformed the Russell 1000 (-20.94%) by 1.5%, while the NASDAQ 100 declined -29.22%. Only 1 S&P 500 GICS Sector produced a positive result and it isn’t surprising that it was energy at +31.8%. The worst performing sector on a total return basis was Consumer Discretion at -32.82%. A consolation prize should be handed out to Utilities that nearly squeaked out a positive result at -0.55%.
For bonds, the story is even more unique, as the Aggregate Index has never had a start to a year with as historic a loss as that which has occurred so far in ’22, as the “bond market” fell >-11%. The ICE BofA Corporate Index fell -13.93% as corporate spreads widened making for a more challenging first six months than similar-maturity Treasuries. HY bonds were off -14.04%. The worst performing area of fixed income was long bonds. The Ryan Index 30-year U.S. Treasury fell by -23.3%, on a total return basis. Long bonds have now produced a -2.83% return for the last 3 years and only a 1.7% annualized return for the last 5 years through June 30, 2022.
The carnage was not just felt in the good old USA either. International markets for both bonds and stocks were rocked by all of the same factors that profoundly impacted the US markets. Japan (-8.3%), Germany (-19.5%), Canada (-11.1%) are representative of the losses incurred in those regions. Only one of the countries that we follow (Argentina) produced a positive result in the first half at 5.93%. You got me as to why.
Did anything work in 2022? Well, yes, but you would have needed to be in commodities, which advanced by 26.4% as measured by the S&P GSCI. Energy and grains were the key drivers although a couple of metals, such as nickel, produced positive results to start the year. Despite the troubling inflationary environment, neither gold nor silver was up. The US $ was also a winner advancing by 9.4% so far in 2022. Mexico and Brazil witnessed price appreciation, as well, although neither advanced as much as the US.
Despite the loss associated with traditional pension plan exposures – equities and bonds – the first quarter wasn’t nearly as troubling as the second quarter when it comes to pension funding. The return on long Treasuries, as noted above by the Ryan Index, fell by a greater percentage than the Aggregate index. Pension funding improved as the present value of those future benefit payments fell by more than plan assets on average. The second quarter started off in a similar fashion, but the recent rally in Treasuries likely reduced some of that funding improvement. You’ll have to wait until we produce the Ryan ALM Q2’22 Newsletter to see how plan assets stack up versus plan liabilities so far this year.
Inflation and interest rates will be the key drivers of pension plan performance during the remaining 6 months of 2022. The US Federal Reserve has stated that they will aggressively pursue a policy of tightening until they have reigned in inflation. Will they be successful without pushing the economy into recession? We’ll continue to provide you with our thoughts on this subject and what we believe you need to do to prepare your fund for the next scenario. Stay tuned. Now go enjoy your BBQ.