While July saw a rally in most equity market regions (with the notable exception of China), the notable performance was delivered by US equities which outperformed the World ex US index by 5.8%.

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Chart 1: Comparing regional equity returns in July (USD, TR, %)

^{Source: Refinitiv, FactSet}

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Looking at 10-year annualized returns US equities have delivered 13%, more than twice the 5.9% return from the World ex US.

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Chart 2: Regional 10-year aggregate and annualized returns (USD, TR, %)

^{Source: Refinitiv, FactSet}

July produced an inflection in relative performance characteristics

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The rally in the US relative performance in July saw it rebound back to levels seen earlier this year. By contrast, Emerging Market relative performance weakened

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Chart 3: Relative performance charts for the US and Emerging Markets

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^{Source: Refinitiv, FactSet}

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Sector weighted performance contributions explain why the US outperformed

To identify the driver of US equity outperformance in July, it is useful to utilize sector weighted performance contribution analysis. Exhibit 4 compares the sector weighted contributions for the US and the World ex US indexes. The majority of the almost 6% outperformance of US equities in July was almost entirely due to the scale of contributions from the Technology and Consumer Discretionary sectors.

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Chart 4: Sector weighted performance contributions US and World ex US for July

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^{Source: Refinitiv, FactSet}

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^{Index 15303321 E0922}

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July witnessed a strong recovery in the FT Wilshire 5000 index driven by a rally in growth stocks. Mounting concerns about recessionary headwinds boosted demand for long duration growth stocks by reducing discount rates (via lower nominal and real yields) and by increasing demand for their defensive attributes. The 9.6% rally in the FT Wilshire 5000 was the fifth largest monthly return in the last 20 years.

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Chart 1: The fifth largest monthly return over the last 20 years

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^{Source: Wilshire}

Chart 2: Large-cap growth relative performance has responded to declining real yields

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^{Source: Wilshire, FactSet}

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‍The Technology, Consumer Goods and Digital Info sectors drove Growth performance

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Sector weighted performance contributions take account of both the performance and respective sector weightings. Comparing the sector weighted contributions for large-cap growth and large cap value in July, it can be seen that the majority of growth's 6.4% outperformance relative to value was due to the size of the respective contributions from the key growth sectors - Technology, Consumer Goods and Services and Digital Information.

Chart 3: The sector weighted contributions to July performance

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^{Source: Wilshire}

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A key feature of the sell off was the rotation out of long duration growth and tech stocks in response to rising real yields. It also produced a statistically significant decline in PE valuation.

Correction driven by stagflation and monetary policy angst

As at the close on June 30th 2022 the FT Wilshire 5000 index delivered a negative return of -20.9% for the first half of the year. Most of the negative return was delivered by the substantial Q2 correction of -16.8% as market sentiment reacted to mounting stagflation angst and increasingly hawkish Federal Reserve guidance.

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Chart 1: The largest half year correction on record

^{Source: Wilshire, Refinitiv}

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Chart 2: The correction has rewound the index back to February 2021 levels:

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^{Source: Wilshire, Refinitiv, FactSet}

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However, despite the pullback US equities have still delivered strong nominal and real long-term returns  measured on both an aggregate and annualized basis.

Chart 3: Strong long term Nominal and Real returns

^{Source: Wilshire, Refinitiv, FactSet}

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A key feature of the first half was the long duration (growth) stock sell-off

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A significant element of the correction was driven by a rotation out of long duration growth and technology stocks as real yields increased

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Chart 4: Rising Real Yields have led to Growth stock underperformance/Value stock performance

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^{Source: Wilshire, Refinitiv, FactSet}

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The growth stock underperformance was dominated by the negative sector weighted performance contribution delivered by the Digital Information, Technology and Consumer Goods and Services sectors. Only the Energy sector posted a positive return contribution YTD.

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Chart 5: FT Wilshire 500 Sector Weighted Performance Contributions YTD

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^{Source: Wilshire}

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The correction has produced a significant and rapid PE decline - producing a rarely seen 3 standard deviation move.

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Chart 6: A rapid and large decline in the PE valuation

^{Source: Refinitiv, FactSet}

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Low beta and Value were the best performing factors with momentum lagging. The "Pure" quality factor also outperformed reflecting increased risk aversion. The 16% outperformance of the Value style relative to Growth was a notable feature of the first half of the year.

A rotation to Low Beta and Value

The first half of 2022 produced large rotation in factors utilizing the FT Wilshire "Pure" factor methodology and data. In terms of relative performance, the Low Beta and Value Factors outperformed the most (responding to rising real yields) with the momentum factor underperforming significantly.

The Pure quality factor also outperformed

Interestingly the "Pure" Quality factor outperformed as well (unlike most other Quality Factor indices) - this reflects the Pure Factor methodology stripping away unintended sector and factor exposures. The outperformance of the quality factor reflected the desire to seek protection against recessionary headwinds.

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Chart 1: Pure factor relative performance YTD

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_{Source: Wilshire}

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Mapping the progression of Pure Factor relative performance YTD

Value has persistently outperformed while quality outperformed strongly in Q2. By contrast Momentum declined significantly in Q2 .

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Chart 2: Relative return of Pure Factors YTD

^{Source: Wilshire}

Value outperformance the key feature of the FT Wilshire 500 Size and Style Index returns

In terms of the size indices large and small delivered similar returns YTD with Micro cap slightly underperforming. The scale of the Value style outperformance was the key feature in the first half of 2022.

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Chart 3: FT Wilshire 5000 size and style returns

^{Source: Wilshire}

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A notable feature of 2022 market dynamics has been the 16% outperformance of Value  relative to Growth. The Growth /Value relative return ratio appears to be returning to pre-Covid levels

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Chart 4: Growth Style Index returns relative to Value

^{Source: Wilshire}

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