Weekly Market Update – 4 July 2022

Global markets post worst half-yearly performance in decades

A portion of the substantial gains seen two weeks ago was given up last week as worries continue to grow that the Federal Reserve’s battle against fighting inflation may tip the U.S. economy into recession.

Global equity markets switched back into their usual declines as of late, falling -1.85 per cent last week as represented by the MSCI World Index in AUD terms.

When taking a step back and reflecting on the last six months, it has been amongst the worst on record for the broader stock market.

The S&P500 has fallen over 20 per cent in the first half of this year, which is the index’s most significant loss since 1970. Similarly, the Dow Jones logged its worst first-half performance since 1962, falling over 15 per cent.

The tech-heavy Nasdaq has, unsurprisingly, been the most severely sold-off this year.

Since the indexes’ record high was logged in November of 2021, the index has decreased by more than 30 per cent since the start of 2022.

Several of the index’s most significant weights, being the mega-cap FAANG names, have experienced a broad-based sell-off which has pulled the index down. Streaming platform Netflix experienced a decrease of 70 per cent, and Meta, the parent company of Facebook, has plummeted by 51 per cent. Additionally, Apple and Alphabet have decreased by roughly 23 and 24 per cent, respectively.

After yet another week in the red, the commonly used VIX Index, which is a fear gauge of stock investors’ sentiment, currently sits at 27, which is well above its long-term average in the high teens. Though, context is important here as the VIX has jumped to nearly double what we see currently during the onset of the COVID-19 pandemic and the credit crisis of 2008.

US Data; CPI & Consumer Confidence

Last week, U.S. markets awaited two critical reports, Q1 GDP and Consumer Confidence data, to better understand the path ahead for both markets and the broader economy.

For the first time since the start of the COVID-19 pandemic in 2020, the Bureau of Economic Analysis (BEA) reported a decrease in the U.S.’s real gross domestic product.

Real gross domestic product (GDP) contracted at an annual rate of 1.6 per cent in the first quarter of 2022, which came in 10bps lower than consensus expectations of a decline of 1.5 per cent.

Consumer spending (which roughly accounts for 70 per cent of total GDP) was softer in the first quarter than in previous periods. Spending was revised to an annual rate of 1.8 per cent in the first quarter, down from a prior estimate of 3.1 per cent, indicating that business inventories may start to pile up.

As a reminder, two or more consecutive quarters of negative growth measured by real GDP is widely considered a ‘technical recession.

Therefore, if the U.S. economy did not return to positive growth by last Friday, we’ve essentially entered a recessionary period, which many market participants have been forecasting.

On consumer confidence, the U.S.’s monthly Conference Board index was released, and unfortunately, it did little to alleviate market fears.

The headline level takeaway was that U.S. consumer confidence fell in June to the lowest in more than a year as inflationary fears continue to dampen the economic outlook.

The Conference Board’s index decreased to 98.7 pts, down 4.5 pts from the previous reading in May, and came well below economists’ forecasts, which called for a decline to 100 pts.

The Board’s Expectation Index, which reflects consumers’ six-month outlook, dropped to the lowest in nearly a decade as Americans grew more downbeat about the economy, labour market, and income levels.

Increasing concerns about inflation, particularly rising petrol, housing, and food prices, continue to weigh heavily on consumer sentiment.

The interesting takeaway from the Conference Board report was that many people still feel secure in their current jobs, as the tight labour market continues to be a bright spot for the U.S. economy.

If that remains the case, the economy may be able to avert a potential recession and guide the U.S. to a soft landing as the Federal Reserve continues to raise interest rates to curb price pressures.

ASX 1st half recap – how did we fair locally?

Though we generally recap the ASX weekly, we thought to take the opportunity to reflect on the first half of the year to see how we faired, to see what performed well and what didn’t.

For some context, history has shown that the ASX tends to outperform the US on a relative basis when in a bear market, as the ASX is composed mainly of ‘old economy stocks,’ think commodities, financials, and energy.

However, the opposite is also true. The US tends to outperform the ASX in bullish markets as their major indexes include a heavier allocation to growth and technology names.

History remains true when reviewing markets for the first half of the 2022 year.

For the first six months, the ASX200 fell -10.74 per cent.

The fall contrasts and sits well above falls observed in other global indices, with the S&P500 falling -20.25 per cent and the tech-heavy Nasdaq falling -29.27 per cent for the first half.

For a world dealing with a war in Ukraine, continual COVID-19 policies, supply chain disruption, high inflation, rising interest rates, an energy crisis, and worries about a global recession, our local market has held up well in the grand scheme of things.

Diving deeper, the ASX is broken into eleven sectors, and in the first six months, only three posted positive gains.

Unsurprisingly, the Energy sector posted the strongest gains, adding over 18 per cent for the half-year as broader energy producers and portfolio names such as Woodside Energy Group (WDS) continue to be beneficiaries of heightened oil prices because of tight oil inventories.

Furthermore, the utility sector also posted promising gains for the first half of 2022, gaining 13 per cent.

The defensive nature of utility stocks through names such as Spark New Zealand (SPK), which generates sustainable free cash flows, will likely bode well in a rising interest rate environment.

A combination of slower global growth, increased borrowing costs, and concerns of recession led to a sharp sell-off in the ASX’s Info Technology sector led by declines in the once-loved buy-now-pay-later (BNPL) players, with the tech index shedding over -36 per cent for the first six months. Currently, the PRIME Australian Equity Growth SMA does not hold exposure to the technology sector as we believe valuations still have further room to fall given the current unfavourable macroeconomic headwinds.

Trailing behind tech in terms of first-half losses was the Consumer Discretionary sector, which fell just over 25 per cent. High uncertainty regarding the economic outlook and a cost-of-living crisis has naturally led consumers to increasingly reign in their spending habits and brush off non-essential purchases, which has translated to a sharp sell-off.

It will be interesting to see what unfolds next, though the importance of a long-term view is crucial in times like these.

Understandably, seeing losses, frightening news headlines, and ups and downs of market volatility are unsettling, but swings like this are a natural part of investing in markets.

Historical performance indicates that markets tend to appreciate over time and recover from down periods and holding through market volatility generally results in the best outcome over the longer term.

Stay the course.

Looking ahead

Monday 4th July 2022 – Friday 8th July 2022

  • Monday: AU Building Approvals (May)
  • Tuesday: AU RBA Interest Rate Decision (Jul), UK Composite & Services PMI (Jun)
  • Wednesday: UK Construction PMI (Jun)
  • Thursday: US ISM Non-Manufacturing PMI, US JOLTs Job Openings (May)
  • Friday: US Nonfarm Payrolls (Jun), US Unemployment Rate (Jun)

Friday 1st July, 5pm values

 IndexChange%
All Ordinaries 6,720-42-0.6%
S&P / ASX 2006,540-39-0.6%
Property Trust Index1,334-44-3.2%
Utilities Index7,6791121.5%
Financials Index5,775210.4%
Materials Index15,374-267-1.7%

Friday 1st July, closing values

 IndexChange%
U.S. S&P 5003,825-87-2.2%
London’s FTSE7,168-40-0.6%
Japan’s Nikkei25,935-556-2.1%
Hang Seng21,8591400.6%
China’s Shanghai3,387381.1%

Key dividends

Monday 4th July 2022 – Friday 8th July 2022

  • Monday: Div Pay-Date – ALS Limited (ALS), Macquarie Group Limited (MQG)
  • Tuesday: Div Pay-Date – Incitec Pivot Limited (IPL), National Australia Bank Limited (NAB)
  • Wednesday: Div Ex-Date – Graincorp Limited (GNC) Div Pay-Date – Fisher & Paykel Healthcare Corp Limited (FPH)
  • Thursday: Div Pay-Date – NAB Capital Notes 2 (NABPD)
  • Friday: Div Pay-Date – Orica Limited (ORI)

Contact

Mark Johnson – Chairman of Investment Committee(03) 8825 4738
Guy Silbert – Investment Manager(03) 8825 4750

If you would like to discuss your situation, please speak to your adviser or email clientservices@primefinancial.com.au

Mark JohnsonT: (03) 8825 4738Michelle BromleyT: (03) 8825 4751
Livio Caiolfa T: (03) 8825 4748Nicole LewisT: (03) 8825 4734
Marcus AingerT: (02) 9134 6292Nicholas MillerT: (03) 8825 4722
Dylan CresswellT: (03) 8825 4707Gina McIntoshT: (07) 3557 2557
Jarrod Rodda T: (03) 8825 4729

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

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