After a downbeat Q1, Wall Street has maintained its lackluster journey in Q2. The first half of 2022 could easily be attributed to the Russia-Ukraine war, red-hot inflation and rising-rate worries. The Fed enacted a steep interest rate hike worth 50 basis points in May and another one of 75 bps in June.
No wonder, many analysts are predicting a U.S. recession this year as the economy is still striving to recover from the pandemic. Notably, the American economy contracted an annualized 1.5% quarter on quarter in Q1 of 2022, following 6.9% growth in Q4 of 2021. The yield curve inverted many times in the second quarter, signaling recession risks.
The S&P 500, the Dow Jones, the Nasdaq Composite and the Russell 2000, declined 17.5%, 12.3%, 23.5% and 18.5%, respectively, in the past three months (as of Jun 28, 2022). Oil prices have gained moderately as
United States Oil Fund, LP ( USO Quick Quote USO - Free Report) added only 2.7% in Q2. Global slowdown fears probably quelled the demand for oil.
Against this backdrop, below, we highlight a few ETF events that pulled the strings of Q2 and may play an equal important role in deciding the fate of Q3’s economic and market momentum.
Fed Rate Hike
To contain the red-hot inflation, central banks are tightening policies. The Fed had enacted three rate hikes so far this year and pushed through a total hike worth of 150 basis points, out of which 125-bp came in Q2. Such steep rate hikes flared up recessionary worries and resulted in a flattening yield curve. The yield curve has inverted several times this year.
Still, due to a rising rate trend,
Simplify Interest Rate Hedge ETF ( PFIX Quick Quote PFIX - Free Report) and FolioBeyond Rising Rates ETF (RISR) have added about 24% and 7% in Q2, respectively. We may continue to see aggressive Fed rate hikes in Q3 as well. Recessionary Fears
High inflation, rising interest rates, stumbling economic activity and downbeat stock markets have raised the probability that we may see a U.S. economic recession soon. Deloitte sees about 15% chance of a U.S. economic recession,
as quoted on a New York Times article. Morgan Stanley sees about 30% probability of a recession in the next 12 months, according to the bank’s models.
Goldman Sachs David Mericle and Ronnie Walker put the odds of a recession in the next year at 30%, up from 15% before. JPMorgan Chase economists raised their expected probability of a recession in the next one year to 35%. So, talks of U.S. recession will be high in Q3.
Corporate Earnings Forecast to Come Down?
For Q2 of 2022, total S&P 500 earnings are expected to increase 2.1% from the same period last year on 9.6% higher revenues and net margin compression of 95 basis points,
per the Earnings Trends issued on Jun 22, 2022. However, Q2 earnings estimates are down for 10 of the 16 Zacks sectors since the quarter got underway, with the biggest declines in Retail, Aerospace, Conglomerates, Tech, Consumer Discretionary and Finance. Investors should note that if economic activity gets shattered, we may see more declines in corporate earnings. Russia-Ukraine War
The year can be remembered because of the start of the Russia-Ukraine war. Notably, both countries are commodity-rich and the war has sent prices for energy, grains, and metals surging.
Elements Rogers International Commodity Index-Energy Total Return ETN (RJN) and Invesco DB Commodity Index Tracking Fund ( DBC Quick Quote DBC - Free Report) have gained about 67% and 33%, respectively, this year. More rally in grains is in the cards. Oil Rally to Fizzle Out?
The coronavirus vaccine rollout is gradually helping to control the spread of the outbreak across the globe. Factors like easing Omicron concerns, supply shortages, and geopolitical tensions in Eastern Europe and the Middle East have thus boosted oil prices this year.
United States Oil Fund, LP ( USO Quick Quote USO - Free Report) has advanced 50% this year but added only 2.7% in Q2. This is because recessionary fears weighed on the prospects of oil consumption. China ETFs to Gain Momentum
China ETFs were hit hard earlier in the year due to stringent regulatory scrutiny along with tight COVID-control measures and the resultant lockdown. Chinese tech equities started rebounding in late April as the nation’s top political leaders planned on Friday to boost economic stimulus to promote growth.
There could also be an easing of the continued clampdown on tech firms.
iShares MSCI China ETF ( MCHI Quick Quote MCHI - Free Report) is off 13.5% this year, beating the S&P 500, at the time of writing. Hence, China ETFs may continue to register its winning momentum in Q3 (read: Is Bull Market Approaching? ETF Areas to Bet On).