We believe the very poor performance seen across asset classes in the first half of 2022 is mostly attributable to the conditions that were extraordinarily supportive of asset prices, including a very low cost of capital and very low energy prices.
While inflation remains elevated despite tightening financial conditions, signs of strain are evident in the real economy. The accompanying pullback in long Treasury yields and inversion of the yield curve suggests the bond market is pessimistic about a “soft landing” scenario.
A return to the supportive conditions that fueled markets following 2020’s Covid selloff may be further off than some think, in our view, especially if recession hits.
- The year-to-date selloff has created what the Global Value team views as attractive opportunities to put money to work in companies we believe will be resilient in the face of volatile markets.
Financial markets continued to stagger in the second quarter. Though the pain was broad-based, the suffering was felt most acutely in the stock markets, which posted the worst first half of a year since 1970.1 The S&P 500 Index and the MSCI World Index both slipped into bear markets during the period as they lost an additional 16.1% and 16.2%, respectively.2 Meanwhile, many of the first quarter’s equity market dynamics continued to be felt in the second, most notably the significant outperformance of value relative to growth.
With inflation showing few signs of abating from current multi-decade highs, Federal Reserve rhetoric and action appears focused on achieving price stability before elevated inflation levels become anchored in the national psyche. This effort comes with no small risk, as past attempts to engineer a “soft landing” have shown. With signs of strain already evident in the real economy and bond market signals—and a variety of other secular dynamics providing additional headwinds—it’s clear central bankers have their work cut out for them.
In an environment of pronounced volatility and uncertainty, First Eagle’s Global Value team has continued to look for opportunities to allocate capital to companies we believe possess scarce, durable assets that will support business resilience over the long term, and do so at what we consider attractive prices.
Extraordinary Policy Accommodation Is Fading Fast
We believe the fall from grace across asset classes thus far in 2022 largely has been the result of the normalization of what had been extraordinarily supportive conditions—including the shift away from generationally low costs of capital and energy.
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