By Mark Barnes, PhD, and Christine Haggerty, Global Investment Research
After months of turmoil, global equity markets enjoyed a reprieve in July, buoyed by hopes that worsening economic signals and falling commodity prices could give central banks, led by the Fed, some leeway to recall their tightening campaigns.
As we explain in our latest GIR Performance Insights report, one of this year’s worst performing markets led the upside last month, notably US and growth stocks. The hard-hit Russell 2000 and Russell 1000 indices climbed 10.4% and 9.3%, respectively, sharply paring their deep year-to-date losses. The story was much the same for the FTSE Europe ex UK.
All three indexes outpaced the gains of the FTSE All-World and those of other major markets, particularly Japan and the UK, which best resisted this year’s sharp sell-off.
Global Stock Market Returns – One Month Ended July 31, 2022 (TR, Local Currency %)
read the tea leaves
The feeling of risk remains fragile, and one month is not enough for a change of regime. (Indeed, in a “good news is bad news” twist, stronger-than-expected U.S. jobs gains reported on Friday dampened expectations of an earlier Fed pivot.) Still, examining major influences behind July’s rebound offer some useful insights from the indices for navigating the uncertainties of continued central bank tightening in the months ahead, as well as identifying potential longer-term winners and losers once the tightening cycles monetary completed.
Despite their recent outperformance, the US and European markets continued to trail the global index for the year through July, while the UK and Japan maintained their leadership year-to-date and over 12 months, despite losing ground to the global index in July.
Regional Index Returns vs. FTSE All-World (Rebased, TR, LC)
Growth equity exposures fuel divergence
As we’ve written in previous blog posts (here) and (here), much of the pain in the US market can be attributed to its outsized exposure to the massive collapse of expensive technology and other high-growth stocks this year, coinciding with soaring interest rates and extreme risk aversion.
This and the US market’s lower exposure to resilient defensive groups (Staples and Telecom) and beneficiaries of war-fueled commodity price booms (Materials and Energy) contributed significantly to the US underperformance. United against its global peers. This was particularly true in relation to the UK, with its negligible technological weight.
FTSE USA vs FTSE All-World ex USA sector weights (%) as of July 31, 2022
But risk sentiment turned around in July, triggering a sharp shift in market and sector leadership. The central bank’s determination to raise rates, even in the face of falling commodity prices and rapidly deteriorating economic data, sent long-term bond yields plummeting. Underdog growth stocks saw a strong resurgence globally, while reflation beneficiaries and defensive first-half winners lagged behind.
Sector-weighted contributions to July 2022 returns – US, UK and Europe ex-UK
As noted below, larger rebounds in the technology, consumer discretionary and healthcare sectors led the US to outperform its non-US peers last month.
FTSE USA sector returns vs. FTSE All-World ex USA sector returns (rebase, TR, LC)
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