As we enter the home stretch in what has been a fascinating and painful year in the markets, there are several takeaways, some quite surprising, others not so much.
First, the lack of a significant divergence between the performance of large and small-caps is a big surprise. Large-caps, as measured by the Russell 1000 Index (down 15.31%) are just 69 basis points ahead of small-caps (Russell 2000 Index, down 16%) and 382bps ahead of micro caps (Russell Microcap Index, down 19.13%).
More typically, smaller names will take on greater damage relative to their larger cousins, as investors sell-off more speculative, lower quality names that tend to be smaller. But that has not happened to a great degree so far in 2022.
Second, precious metals have been a dud. Gold is down 4% year-to-date, while silver is off 8% - not what I would have expected in this inflationary environment. Perhaps the rules have been rewritten since our last big bout with inflation, or maybe its too early to tell, but I expected more.
Third, the horrible year bonds have had was the worst kept secret in years. It should not have been a surprise that the Federal Reserve was going to put its foot on the rate-raising accelerator this year and raise rates significantly, nor the affect this would have on bond prices.
Too often, investors view fixed income as the "safe" side of their portfolios, but that was not the case in 2022, especially if the duration of their portfolios was on the high side. Even intermediate bonds took a lot of punishment, and the proof is in the returns of near-term target date funds (2025), which were designed as a "set it and forget it" way for investors to manage their funds without paying attention.
Many of these are down nearly as much as large-caps, despite their mid-50%/mid-40% stock/bond allocations, and damage to the bond side is due to durations that were typically in the six range. (Duration is a measure of bond risk. The higher it is the greater the damage when interest rates rise, and more they benefit from falling rates).
Fourth, value has significantly outperformed growth, which was not a surprise. Within large-caps (Russell 1000), Value (down 4.78%) has outperformed Growth (down 24.48%) by an astounding 1970bps. Outperformance was less pronounced in smaller names, within small-caps (Russell 2000), Value (down 9.67%) is ahead of Growth (down 22.29%) by 1262 bps. Within microcaps (Russell Microcap Index) Value (down 13.78%) is currently beating Growth (down 27.09%) by 1331bps.
One last potential surprise/no surprise should start taking real shape today - the plight of the ever-important Q4 retail sales. With inflation still raging, and consumers more wary, this has all the signs of a bad holiday retail season. But will it turn out that way? "Not as bad as expected" will still be seen as a positive. Stay tuned...
