Global stock markets have struggled, in general, this year. The S&P 500 is well off its March lows, but it is still down 7.54% through the first three and a half months for the year. However, some areas of the market are doing better than others as new investment themes emerge around higher than normal inflation, rising interest rates, and a renewed focus on current cash flows over future growth.
Growth Stocks versus Value Stocks: Growth stocks have declined in value by more than 14% so far in 2022 as many investors have shifted their focus from favoring companies with little current earnings, but higher than average expected growth, to companies with higher current earnings and cash flows that are expected to be more consistent over time. Value stocks, which tend to have slower but more steady earnings, have largely avoided the downward pressure on stocks this year with the value index down just 0.17% through April 15th. This continues a trend that started in the first week of the year which so far shows little signs of abating.
Income Growth versus Income Stability: Bonds pay income in the forms of relatively stable interest payments. Meanwhile, some stocks offer income in the form of dividend payments which are subject to the dividend strategy implemented by board of directors and are generally less secure than interest payments. However, unlike most bond interest payments, stock dividends tend to increase over time as a company’s financial performance improves. This year investors appear to be favoring stock dividends because of the potential for income growth over time. Dividend paying stocks have returned 5.8% this year while the US Aggregate Bond index has declined 8.5% over the same period. With the economy growing, inflation high, and interest rates rising, investors appear willing to trade the higher stability of bond interest payments for riskier stock dividends that may increase over time.
Commodities versus Stocks: After a decade of poor performance compared to stocks, commodities have finally experienced strong performance over the past several months. So far in 2022 the Goldman Sachs Commodity Index is up over 40% compared to a decrease of 7.5% for US stocks. The commodity gains have been led by the increase in price for energy commodities such as oil and natural gas. These commodities are benefiting from dual tail winds of the reopening of economies globally following the COVID shutdowns and the uncertainty around energy markets from Russia’s invasion of Ukraine. This has caused some money to flow out of stock markets and into commodity markets chasing higher returns and protection from inflation.
Foreign versus US Stocks: Foreign stocks have experienced even more volatility than US stocks this year as geopolitical risks have roiled the markets but impacted the markets closer to the conflict in Europe more than the US. In addition, the US dollar has strengthened as it often does when investors move to invest in markets that are perceived to be more stable during times of political and economic uncertainty. However, despite the increased volatility, foreign stocks have proven to be fairly resilient in comparison to US stocks having posted a decline of 8.5% compared to 7.5% for the US markets.
Small Company Stocks versus Large Company Stocks: Small company stocks have declined more than large company stocks in 2022 with the small cap stock index down 10.4% compared to 7.5% for large cap stocks. This could be due to the increased historical volatility of small company stocks which often tend to increase more when stock prices are up and decrease more when stock prices are down. However, it may also be related to small companies having reduced access to capital markets at favorable terms and therefore the potential that higher interest rates will hit smaller companies harder than larger blue-chip companies.