Weekly Market Trends: Recession Fears Grow, New Volatility Regime

As the global economic outlook grows grimmer and recession fears mount, how can investors mitigate downside risk while still pursuing upside opportunities?

Head of SPDR Americas Research

This post was written with contributions from Vasco Laranjo. Vasco is a Research Analyst on the SPDR Americas Research Team.

Equity Market Rebounds Sharply

Last week the S&P 500 rebounded sharply, advancing 6.5% and putting an end to its three-week losing streak.1 While the US 10-year yield edged slightly lower to 3.13%, it still remains in the 99th percentile over the past ten years.2

Anxiety Persists as Fed Seeks to Bring Down Inflation

But a multitude of obstacles — tightening monetary policy, fading fiscal stimulus, the ongoing Russia-Ukraine War — have created a complex new volatility regime. The CBOE VIX Index, commonly known as the fear index, is averaging 26.3 in 2022 versus its long-term average of 19.6.3 And the University of Michigan’s Consumer Sentiment Index reflects deep anxiety, falling to 50.0 in June, the lowest level since the mid 1970s.4

Inflation remains top of mind. Federal Reserve (Fed) Chairman Powell addressed Congress on June 22, noting that the Fed is “strongly committed” to bringing down inflation. While Powell thinks tighter monetary policy will be an effective tool, he acknowledged that steep interest-rate hikes could push the US into a recession. In other words, achieving a soft landing will be challenging.5 The European Central Bank (ECB) is also holding its 3-day Forum in Portugal this week, where the panel discussion with Powell will be closely watched for insights into the trade-off between curbing inflation and ensuring a soft landing.

In New Volatility Regime, Fundamentals Matter

In this new volatility regime, as the global economic outlook grows grimmer and recession fears mount, how can investors mitigate downside risk while still pursuing upside opportunities?

In considering this question, two trends stand out:

  1. Firms with positive trailing 12-month earnings are only down 18% in 2022 versus a 36% drop for firms with negative earnings.6
  2. Monthly excess returns to the broader market for value stocks have shown a positive correlation (+16%) to changes in interest rates, whereas growth stocks have shown a negative one (-15%).7

Simply put, it may be beneficial to focus on quality, with a value bias.

Investment Idea: Balance Upside Opportunity and Downside Risk

As market dynamics continue to be unsteady, a blend of low-volatility, quality, and value factors could help investors balance upside opportunities and downside risks.

SPDR® MSCI USA StrategicFactorsSM ETF (QUS)

QUS blends low-volatility, quality, and value factors in a single strategy. Since its inception, the fund’s systematic approach has resulted in lower downside risk. Each time the market has fallen by more than 10%, QUS has had a 1.6% smaller drawdown, on average.8

In the top quintile of its Morningstar peer category based on annualized return, QUS ranks among the top 10% of its peers based on risk-adjusted performance since inception.9 Investors looking for a risk-efficient exposure in the current volatility regime may want to consider QUS.

QUS Performance, Sharpe, and Sortino Ratios Versus Peers Since Inception

QUS Standard Performance

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