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Volatility: Brought to You by the
Letter "I"

Market vitals

  • Global stocks were volatile intra-month and ended May about flat.
  • Rising inflation and countermeasures remain a key focus for economies globally.

Market summary

Global stocks fell -5.7% in the first half of May but subsequently recouped those losses in the second half, ending the month roughly flat (+0.1% as measured by the MSCI ACWI Index). Stocks in Europe advanced approximately 1%; Asia Pacific stocks advanced 0.7%; Latin American equities advanced more than 8%; while US stocks declined -0.2%. The combination of higher inflation, rising interest rates, the war in Ukraine and COVID surges in certain countries kept equity market volatility elevated throughout the month in many areas.

Exhibit 1 — Global Stocks End Volatile May Mostly Unchanged (%)


Exhibit 1

Source: FactSet, as of 31 May 2022.

In non-US markets, the energy sector was a standout in May posting gains of approximately 9% as oil climbed above the $120 mark (again) and natural gas prices reached $9. Russia’s ongoing war in Ukraine continues to drive commodity prices higher, and additional sanctions such as the European Union’s recent agreement on a partial ban of Russian oil imports (plans to ban 90% of Russian oil imports by end of 2022) adds additional upward price pressure. Other sectors that posted modest gains in May included communication services, technology, financials and consumer discretionary. Heath care, consumer staples and real estate stocks declined during the month.

Exhibit 2 — May Sector Performance, MSCI ACWI ex USA Index (USD) (%)


Exhibit 2

Source: FactSet.

Brought to you by the letter “i”

Economies globally continue to face inflationary pressures due in large part to post-pandemic demand and the war in Ukraine. As central banks raise interest rates to combat inflation, and demand subsides as prices continue to go up, inflation is expected to normalize, though the timing and magnitude will vary depending on the individual country/economy.

  • Inflation in the eurozone hit 8.1% in May, higher than the 7.4% rate recorded in April and March. The European Central Bank (ECB) plans to meet in July when it’s expected that policymakers will increase interest rates for the first time in 10 years as a means to fight inflation. Energy and commodity prices in the region have been on the rise and inflationary pressures have seeped into other areas such as food and drink prices.
  • As Russia’s war in Ukraine persists, Ukraine’s central bank has been forced to increase its key interest rate to 25% (from 10%) to address inflation — the first increase since the war broke out in late February.
  • For the first time in seven years, core consumer inflation in Japan rose 2.1% y/y, higher than the Bank of Japan’s (BOJ) 2% target. Fuel and raw material costs were the primary drivers of the increase, and the BOJ expects the recent rise to be temporary, holding steady on not making changes to its current stimulus efforts.

Exhibit 3 — Inflation CPI, Annual growth rate (%)


Exhibit 3

Source: OECD as of April 2022 (percentage change on the same period of the previous year, %).


Chinese equities have declined -16.7% this year (as measured by the MSCI China Index) as the country continues to battle coronavirus, and strict lockdown policies driven by its zero-tolerance approach have put a damper on economic growth. Stocks ended the month of May in positive territory, up 1.2%, rebounding alongside other global markets. Some Chinese companies have used the lower valuations this year to buy back stock, in an effort to boost shareholder returns and bolster investor confidence. Additionally, China recently lifted some of its harsh COVID-lockdown restrictions in Shanghai, hoping it will help lift economic activity.

Latin America/Brazil

The strong returns in Latin America this month were largely attributable to Brazil, where stocks advanced 8.4% (as measured by the MSCI Brazil Index). Brazilian equities were up more than 40% year-to-date as of 4 April 2022. However, the Brazilian stock market shed a large portion of those gains in April and the first half of May as concerns over its presidential election in October and double-digit interest rates clouded the outlook for the second half of 2022. Brazilian stocks rebounded in the back half of May with other global markets, bringing year-to-date gains to roughly 27%.

MSCI ACWI Index measures the performance of large- and mid-cap stocks across 23 developed and 25 emerging markets. MSCI ACWI ex USA Index measures the performance of large- and mid-cap stocks in developed (excluding the US) and emerging markets. MSCI USA Index measures the performance of large- and mid-cap stocks in the US market. MSCI China Index measures the performance of large- and mid-cap stocks across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g., ADRs). MSCI Brazil Index measures the performance of the large- and mid-cap stocks of the Brazilian market. The indexes are unmanaged, market capitalization weighted, include net reinvested dividends, do not reflect fees or expenses (which would lower the return) and are not available for direct investment. See for full disclaimers.

The views expressed are those of Diamond Hill as of June 2022 and are subject to change without notice. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Investing involves risk, including the possible loss of principal. Past performance is not a guarantee of future results.

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