After three straight years of positive annual returns, 401(k) participants face a nearly 18% decline as we hit the halfway point of 2022.
Just two years ago, as the pandemic took hold across the globe, 401(k) participants watched their account balances get walloped. In the first quarter of 2020, the Mid Atlantic Trust Company 401(k) Composite Benchmark showed a 16.12% decline for that quarter alone for the hypothetical 401(k) participant. But, of course, from that low point, the markets came roaring back with solid gains achieved throughout the remainder of 2020 to finish the year at +14.85%. Tack on gains of over 14% for 2021 and 401(k) participants rode one of the strongest two-year market rallies in history.
Sometimes, of course, as quickly as the market “giveth,” the market “taketh away.” With the closing of the books on the first half of 2022 at the end of June, 2020, we closed out the worst first-half performance in global markets in decades as fears grew that the central banks would push economies into a recession with their fight against inflation, ongoing supply-chain issues, and the Russia-Ukraine war. For the second quarter, the S&P 500 fell more than 16% – its biggest one-quarter fall since March 202, the Dow Jones Industrial Average staged its worst first-half performance since 1962, losing 11.3%, and the Nasdaq suffered its biggest quarterly drop since 2008, losing 22.4%. Meanwhile, the Mid Atlantic Trust Company 401(k) Composite Benchmark also took a hit in quarter two, with a -12.96% return, putting it down -17.99% year to date, but in better shape than the Nasdaq and S&P 500 indices.
ABOUT THE MID ATLANTIC 401(k) BENCHMARK
Mid Atlantic Trust Company is a leading financial services organization that provides a wide array of brokerage, advisory, and trust services to a diverse national client base of financial advisors and institutions, asset managers, and benefits administrators through its various subsidiary companies. Because we provide these services, Mid Atlantic Trust Company has plan investment data on over 100,000 401(k) plans representing approximately $120 billion in assets. In response to requests from our institutional clients, we have created the Mid Atlantic Trust Company 401(k) Composite Benchmark. Using data from plans serviced by Mid Atlantic Trust Company with assets of at least $100,000 at the beginning and ending of the month, the Mid Atlantic Trust Company 401(k) Composite Benchmark is designed to reflect the portfolio performance across 401(k) plans serviced, in any capacity, by Mid Atlantic. See the “Methodology” section of this report for details on how the composite benchmark is calculated.
* For the hypothetical participant balances, we used a starting balance based on the average 401(k) participant balance provided by the Investment Company Institute for the Year of the starting balance. In our calculation, we assumed a starting annual salary of $50,000, a combined employee/employer 9% annual contribution rate, and a 3% annual salary increase and applied the monthly rate of return of the Benchmark.
Market Data as of Week Ending: 07/22/2022 unless noted otherwise
U.S. stock prices gained as companies in the S&P 500 have generally reported better than expected results for the second quarter. Sentiment has shifted back toward investors embracing risk assets, with an emphasis on growth stocks, as the economy starts to show signs of slower growth. Value stocks lagged their growth counterparts while mid-sized companies generally outperformed their small and large company peers. Most of the major economic sectors produced gains for the week and were led by strength in the consumer discretionary, materials, industrials, and information technology sectors. Traditionally defensive sectors such as utilities, health care, and consumer staples lagged. Developed foreign and emerging market stock prices also delivered solid gains and outperformed the U.S.
U.S. Treasury yields declined as the 10-year U.S. Treasury fell to 2.75% and the 2-year yield ended the week at 2.97%. When short-term yields are higher than longer-term yields, it’s typically associated with slower growth and higher recession risks. Lower quality bonds outperformed and were led by outperformance from long duration high yield bonds. Government bonds lagged but still delivered gains across the yield curve. Yields on investment grade and high yield corporate bonds declined and finished the week at 4.4% and 8.1%, respectively.
Economic releases were generally worse than expected and are indicating that the economic growth is slowing, increasing the risk of recession. The July reading of the S&P Global Flash US Composite PMI came in at 47.5 and contracted (below 50) for the first time in nearly two years as both manufacturers and service providers reported softer demand. Initial jobless claims rose to 251,000, a new high for the year, and continuing claims rose to 1.4 million. Housing starts declined 2% in June and prices remain elevated as the median price of existing homes increased more than 13% over the previous 12 months. In Europe, the ECB lifted policy rates for the first time since 2011 to address inflation in the region. In the United Kingdom, which officially left the EU in 2020, inflation climbed to a new four-decade high of 9.4%.
Market Data as of Week Ending: 07/15/2022 unless noted otherwise
U.S. stock prices declined as inflation rose to 9.1%, the highest annual increase in more than 40 years. Typically, investors are already focused on quarterly financial results; however, this week’s sentiment was more centered on inflation and its influence on the upcoming Fed policy meeting. Value stocks narrowly outperformed their growth counterparts while small-sized companies generally lagged their mid and large company peers. Consumer staples was the only major economic sector with a gain, followed by relative outperformance in other traditionally defensive sectors, health care and utilities. Crude oil prices declined to less than $100 per barrel and energy stocks were among the worst performers along with the communication services, industrials and materials sectors. Developed foreign and emerging market stock prices also declined and underperformed relative to the U.S.
Longer term U.S. Treasury yields declined as the 10-year U.S. Treasury fell to 2.92%. However, the 2-year yield was slightly higher ending the week at 3.13%. When short-term yields are higher than longer-term yields, it’s typically associated with slower growth and higher recession risks. Higher quality bonds outperformed and were led by outperformance from long duration government bonds. High yield corporate bonds lagged but still delivered gains across the yield curve. Yields on investment grade and high yield corporate bonds were little changed, finishing the week at 4.6% and 8.6%, respectively.
Economic releases were headlined by the monthly inflation readings that come from the Consumer Price Index (CPI). The June report showed a monthly increase of 1.3%, which was 9.1% higher than the same period 12 months ago. Even after excluding the more volatile food and energy prices, the monthly Core reading was 0.7% and gained 5.9% over the past year. Retail sales were better than anticipated and advanced 1.0% in June and 8.4% compared to the same period one year ago; however, those figures are not adjusted for inflation. Consumer sentiment beat expectations and rose from a record low of 50.0 in June to 51.1 in July. In Europe, the euro and the U.S. dollar were both priced at 1 for the first time in two decades as the European central bank still has not lifted policy rates to address inflation in the region.
Market Data as of Week Ending: 07/08/2022 unless noted otherwise
U.S. stock prices advanced as signs start to emerge that the economy may be able to withstand an imminent recession. Investors will soon focus on quarterly financial results, but this week’s sentiment was more focused on the Fed. Minutes from the June meeting were released and recent comments from Fed voting members were optimistic about reducing inflation without forcing the economy into a recession. Growth stocks rotated back into favor and outperformed their value counterparts while small-sized companies generally outperformed their mid and large company peers. Consumer discretionary, information technology, and communication services sectors outperformed with solid gains. However, nearly half the major economic sectors recorded losses for the week led by declines in the energy, utilities, and materials sectors. Developed foreign and emerging market stock prices also recorded gains for the week, but underperformed relative to the U.S.
U.S. Treasury yields rose after three consecutive weeks of declines. The 10-year U.S. Treasury rose to 3.08% and the 2-year yield was slightly higher at 3.11%. Rising yields are generally viewed as positive for the economy; however, when short-term yields are higher than longer-term yields, it’s typically associated with slower growth and higher recession risks. High yield corporate bonds outperformed and were the only major bond segment to record gains for the week. Higher quality and longer duration bonds lagged as investors were willing to accept more credit risk. Yields on investment grade corporate bonds narrowly rose while high yield corporate bonds declined, finishing the week at 4.7% and 8.6%, respectively.
Given the lack of volume from an economic data perspective, investors were focused on the two monthly job reports from the Labor Department and comments from the Federal Reserve. Job openings declined from 11.7 million to 11.3 million and there were 372,000 jobs added in the month of June. The unemployment level remains steady at 3.6% and nearly all the jobs lost from the pandemic have been recovered. Investors expect the Fed to announce another rate hike of 0.75% at their meeting later this month as Fed policy makers have foreshadowed their views through public comments. In Europe, Boris Johnson announced his intention to resign amidst a series of scandals. Meanwhile, in Asia the assassination of Shinzo Abe, Japan’s former prime minister, shocked the world.
Market Data as of Week Ending: 07/01/2022 unless noted otherwise
U.S. stock prices could not maintain positive momentum as major indices rotated back toward losses for the week. A fresh wave of weak economic data was released, and several companies warned that profitability will be challenged as demand is expected to slow. Second quarter earnings growth expectations have declined by nearly 2% over the past three months. Value stocks returned to the forefront and outperformed their growth counterparts while mid-sized companies generally outperformed their small and large company peers. Energy and traditionally more defensive sectors such as utilities, consumer staples, and health care were the only sectors to record gains. Consumer discretionary, information technology, and communication services sectors lagged in these more volatile and higher growth areas. Developed foreign and emerging market stock prices also declined with mixed results, relative to the U.S.
U.S. Treasury yields fell for the third consecutive week as investors continue to price in higher probabilities that the U.S. is headed toward a recession. The 10-year U.S. Treasury fell to 2.88%, its lowest level in more than a month. Higher quality and longer duration bonds outperformed as investors showed a strong preference for safety and cash flow visibility. High yield bonds declined and were the worst performing segment across the curve. Yields on investment grade corporate bonds narrowly fell while high yield corporate bonds moved higher, finishing the week at 4.6% and 8.9%, respectively.
Economic data releases were largely disappointing as they were generally worse than expected. Consumer confidence has been declining and the Conference Board’s index dropped 4.5 points to its lowest level in nearly a decade. That sentiment is starting show in consumption activity as consumer purchases declined 0.4% in May, after adjusting for inflation. This was the first decline of the year and was largely driven by a pullback in purchases of goods. Inflation data from the PCE index showed some signs that inflation may be peaking as core prices (excludes food and energy prices) were up 0.3% in May, the same increase for the fourth consecutive month. In Europe, central bank policy makers contemplated the possibility of raising rates as high as 0.50% as inflation remains a global issue. According to Eurostat, inflation in the region accelerated to another record high of 8.6% in June.