Message
from the President
A
series of economic and geopolitical challenges undermined equity and
fixed-income markets during the six-month reporting period ended
October 31, 2022. Stocks and bonds alike trended lower in the face of
sharply rising interest rates, increasing inflationary pressures, slowing
economic growth and Russia’s invasion of Ukraine.
The
reporting period began on a mixed note, with concerns about rising inflation and
Russia’s invasion of Ukraine weighing on markets. On one hand, rising commodity
prices and hopes that inflationary pressures might subside supported some asset
classes and sectors. On the other, the U.S. Federal Reserve (the “Fed”) issued
increasingly hawkish statements regarding its intention to combat mounting
inflation. As a result, equity markets remained flat while U.S. fixed-income
markets gained modest ground in May. Early June saw a downturn across asset
classes as economic data showed increasing inflationary pressures, causing
investors to anticipate a higher-than-previously-expected rate increase from the
Fed at its meeting on June 15, 2022. Indeed, the Fed raised rates by 0.75%
at that meeting, from a range of 0.75% to 1.00% to a range of 1.50%
to 1.75%, its largest increase of the year to date. Markets rallied in the
wake of the Fed meeting as investors started to hope that slowing economic
growth might lead to rate decreases later in the year. In August, however, signs
of persistently increasing inflation and statements from the Fed indicated that
further rate increases were seen as necessary, undercutting optimism and driving
stock and bond prices lower through mid-October. The Fed implemented two
additional 0.75% rate increases during that time, with additional increases
expected before the end of the year. International central banks generally
raised rates as well, in efforts to curb local inflation, although most
increases remained significantly more modest than those in the United States.
Relatively high U.S. interest rates and international risk-averse sentiment
pushed U.S. dollar values higher compared to most other currencies, with the
ensuing negative impact on global prices for food, fuel and other key,
U.S.-dollar-denominated products.
Despite
a rally in the closing weeks of October, the S&P 500® Index, a widely
regarded benchmark of U.S. market performance, declined by more than 5% during
the reporting period. Although the energy sector generated strong gains,
bolstered by elevated oil and gas prices, most other industry areas recorded
losses. The more cyclical and growth-oriented sectors of consumer discretionary,
real estate and information technology delivered the weakest returns, while the
traditionally defensive and value-oriented consumer staples, utilities and
health care sectors outperformed. International stocks lagged compared to their
U.S. counterparts, with some emerging markets, such as China, suffering
particularly steep losses. A few markets, however, including Brazil and Mexico,
gained ground. Fixed-income markets saw bond prices broadly decline as yields
rose along with interest rates. Short-term yields rose faster than long-term
yields, producing a yield curve inversion from July through the end of the
reporting period, with long-term rates remaining below short-term rates. Some
floating-rate instruments, which feature variable interest rates that allow
investors to benefit from a rising rate environment, provided a degree of
insulation from inflation-driven trends.
While
the Fed acknowledges the costs of rising rates in terms of weaker GDP (gross
domestic product) growth and unsettled financial markets over the short term,
its primary focus continues to be the longer-term economic impact of inflation.
With the latest figures as of the date of this report showing that inflation
remains above 8%, versus a target rate of just 2%, the Fed clearly has a
distance yet to go, making further rate increases and market volatility more
likely in the coming months. The question remains as to whether the Fed and
other central banks will manage a so-called “soft landing,” curbing inflation
while avoiding a persistent economic slowdown. If they prove successful, we
expect that favorable inflation trends and increasingly attractive valuations in
both equity and bond markets should eventually translate into sustainable
improvements in the investment environment.
Whatever
actions the Fed takes and however financial markets react, you can depend on us
to provide you with the intelligent investment solutions that define the IndexIQ
portfolio of exchange-traded funds. Thank you for trusting us to help you meet
your investment needs.
Sincerely,
Kirk C.
Lehneis
President
The
opinions expressed are as of the date of this report and are subject to change.
There is no guarantee that any forecast made will come to pass. This material
does not constitute investment advice and is not intended as an endorsement of
any specific investment. Past performance is no guarantee of future
results.
Not
part of the Semi-Annual Report
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