Market insights and analysis

How dynamic, risk-managed investment solutions are performing in the current market environment

2nd Quarter | 2022

Market insights and analysis

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Updates on how dynamic, risk-managed investment solutions are performing in the current market environment.

By Jason Teed

Inflation continued its climb to multi-decade highs during the second quarter, and the Federal Reserve’s response grew increasingly aggressive: a 25-basis-point interest-rate increase in April, a 50-basis-point increase in May, and a 75-basis-point increase in June. Estimates of the final resting place for interest rates at the end of the year were revised upward to about 3.45%.

These rate hikes will likely slow economic growth. Slowing the economy is designed to bring the high inflation rates down in the future. The trick is to raise rates high enough to bring inflation down, but not so much that it sparks a recession.

At the beginning of the quarter, market analysts put the odds of a recession at around 33%. By the end of the quarter, those odds had increased to around 52%. The anticipation of a recession caused equities to fall. Reflecting this weakness, the two-year/10-year yield curve was inverted (meaning the short-term rate exceeded the long-term rate—which historically has been viewed as an indicator of a pending recession) for much of the quarter. The Federal Reserve is expected to continue aggressively increasing short-term rates until inflation lessens.

The major U.S. stock market indexes fell into bear market territory. For the quarter, the S&P 500 lost 16.1%, the Russell 2000 dropped 17.2%, and the NASDAQ Composite gave back 22.3%. Risk-on sectors fared the worst: Consumer Discretionary and Technology stocks fell about 25.5% and 19.8%, respectively. Defensive sectors fared better: Utilities and Consumer Staples fell only 5.1% and 4.2%, respectively. The markets also experienced bear market rallies at the end of May and June, making market timing more difficult for tactical traders.

Safe-haven assets provided less protection than is typical during a risk-off environment. Gold was down 6.72% for the quarter, and aggregate bonds were down 4.6%. The current rising rate environment is detrimental to all three asset classes: equities, bonds, and gold. In such an environment, cash tends to be the only place investors can turn to for safety. That has certainly been the case so far this year. This puts investors in a precarious position: Passive investors lose out on the benefits of diversification (which works best when assets move in opposite directions), and active investors have fewer tools with which to achieve portfolio gains and preserve capital.

The recent poor performance of almost all asset classes this quarter meant only about 2% of our strategies posted quarterly gains, though about 97% of our strategies outperformed the S&P during the period. Our top performers were mostly bond rotation strategies, in addition to more aggressive tactical strategies that timed the markets well during the quarter. Volatility Adjusted NASDAQ was our best-performing strategy for the quarter, and Evolution Plus Conservative was our best-performing core strategy.



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