SOLR - Stock Rally Fades As Rate-Hike Fears Rise
Summary
- Officials at the world's major central banks, led by the US Fed, grew increasingly united in their resolve to bring inflation under control.
- The August about-face pulled the Europe ex UK and both US Russell indexes back down to the bottom of the performance ranks for the year.
- Most of the world’s central banks redoubled their anti-inflation messaging, sending the 10-year Treasury yield back above 3%.
By Mark Barnes, PhD, and Christine Haggerty, Global Investment Research (GIR)
Global stocks ended the summer in retreat, as officials at the world's major central banks, led by the US Fed, grew increasingly united in their resolve to bring inflation under control, even at the risk of triggering a severe economic slowdown.
As we highlighted in our latest GIR Performance Insights , after leading the rally in July, European and US stocks took the biggest hits in August, trailing the FTSE All-World Index and other major developed markets, particularly versus gains in Japan and Asia Pacific. The Emerging index led the pack, rebounding from July losses, helped by especially strong showings in Brazil and emerging Asian markets. Notably, the Russell 2000 held up better than the Russell 1000, after outpacing its large-cap counterpart in the July upswing.
Global equity market returns (TR, local currency) - One month ended August 31, 2022
Source: FTSE Russell. Data as of August 31, 2022. Past performance is no guarantee to future results. Please see the end for important disclosures.
The August about-face pulled the Europe ex UK and both US Russell indexes back down to the bottom of the performance ranks for the year so far (with percentage losses in the mid-teens). The UK and Japan extended their outperformance versus the global index and markets elsewhere for the year and 12-month period, after trailing in July.
Regional index returns relative to the FTSE All-World Index (rebased, TR, LC)
Source: FTSE Russell. Data through August 31, 2022. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
The Tech vs Energy battle continues
The August slump also drove big swings in sector leadership. The best performers in July, notably technology and other high-growth stocks, suffered the steepest declines in August. Energy stocks topped the charts across the major markets in August, after counting among the worst laggards in July. The main culprit behind these reversals? Shifting interest-rate expectations.
As we covered in an earlier blog post , the 10-year Treasury yield tumbled to a low of 2.6% in July as deteriorating economic data and plunging commodity prices raised investors' hopes for a quicker end to aggressive central-bank tightening cycles. As long-duration assets, growth stocks typically perform well when bond yields fall.
But those hopes were soon dashed, as most of the world's central banks redoubled their anti-inflation messaging, sending the 10-year Treasury yield back above 3%. The equity selloff accelerated following an unexpectedly hardline speech by US Fed Chair Jerome Powell at the Jackson Hole, Wyoming, confab in late August. (Though stocks rebounded a bit in early September, markets took another huge one-day hit following the release of the latest US inflation data, which came in higher than investors expected., while bond yields jumped.)
As the chart below illustrates, though industry contributions in the US, UK and Europe were nearly universally negative in August, the biggest detractors were in consumer discretionary, health care and tech. Energy was the only positive contributor across all three markets, particularly in the UK, where it makes up more than 13% of the index, versus less than 5% for the US and Europe. Tech was by far the biggest drag in the US, where it accounts for nearly 28% of the index, versus respective weights of roughly 1% and 8% in the UK and Europe.
Industry-weighted contributions to returns (TR, LC %) - one month ended August 31, 2022
Source: FTSE Russell. Based on Industry Classification Benchmark (ICB) data as of August 31, 2022. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
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Stock Rally Fades As Rate-Hike Fears Rise