This post was written with contributions from Brianna Roberts. Bree is a Research Analyst on the SPDR Americas Research Team.
In Europe, eurozone inflation rose 8.6% year-on-year in June.1 All eyes will be on the ECB’s July meeting, when interest rates are expected to rise for the first time in 11 years.
In the US, recession fears continue to mount and can be seen in a multitude of data:
the US 10-year yield fell sharply below 3% as investors turn to safety2
the Institute for Supply Management (ISM) national factory activity fell to the lowest level since May 20203
consumer confidence fell to its lowest level since February 20214
Take a Holistic View of Coverage
Persistent market volatility continues to put pressure on risk assets, underscoring the importance of taking a holistic view of portfolio allocations. Making investment decisions requires attention to the whole portfolio, not just the asset classes being punished the most at one point in time.
Insurance: A Brighter Spot Within Financials
While financials have suffered from persistent inflation and slowing economic growth as a whole, the insurance industry has experienced lesser drawdowns than the broader sector and market (-5.27% year to date compared to -18.73% and -19.96%, respectively).5 This is due in part to their positive relationship to interest rates and their ability to pass inflationary pressures on to consumers through higher premiums.
Insurance firms also have stronger growth expectations as full-year 2022 earnings-per-share forecasts have modestly increased on the year (+0.37%), while the broader sector has witnessed a decline in forecasts by 2%.6
Adjust for Higher Rates with Insurance
While rising rates have historically been a tailwind for financials in general, the boost has not been equal across all financial industries. This is clear when looking at the differing return trends between regional and national banks, capital markets, and insurance companies this year. The insurance industry has experienced less macro sensitivity and in turn, less volatility.
Source: FactSet, data from July 1, 2019 through June 30, 2022. Past performance is not a reliable indicator of future performance. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable. Insurance = S&P Insurance Select Industry Index. Capital markets = S&P Capital Markets Select Industry Index. Banks = S&P Banks Select Industry Index. Regional banks = S&P Regional Banks Select Industry Index.
SPDR® S&P® Insurance ETF (KIE)
Markets have been turbulent in 2022, amid a rising rate environment with unchecked inflation. Taking a more defensive approach may benefit investors who seek to participate in potential upside while mitigating losses. To position for higher rates and continued market uncertainty, investors may want to adjust their industry coverage and consider an allocation to the SPDR® S&P® Insurance ETF (KIE).
1 Eurostat, July 1, 2022. https://ec.europa.eu/eurostat/documents/2995521/14644614/2-01072022-AP-EN.pdf/72dcf5e4-56cb-5b8c-1a1f-d342666b8657?t=1656592347325#:~:text=Euro%20area%20annual%20inflation%20is,office%20of%20the%20European%20Union 2 Bloomberg Finance, L.P., as of July 1, 2022. 3 Institute for Supply Management, July 1, 2022. https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/pmi/june/ 4 The Conference Board, June 28, 2022. https://www.conference-board.org/topics/consumer-confidence 5 FactSet, data from January 1, 2022 through June 30, 2022. Insurance industry = S&P Insurance Select Industry Index. Financial sector = S&P Financial Select Sector Index. Broader market = S&P 500 Index. 6 Bloomberg Finance, L.P., as of June 28, 2022, based on firms in the financial sector within the S&P Supercomposite Financial Sector Index.
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