The S&P Kensho New Economy Indices seek to track the industries and innovation of the Fourth Industrial Revolution
The last quarter of 2022 saw U.S. equities rebound from their YTD lows as inflation prints started to cool. While the Fed has not relented on its hawkish stance, despite multiple forward-looking indicators pointing to a recession ahead, wages have provided a sturdy support to consumer spending on goods and services. Additionally, the uncertainty at the start of the Q4 over the U.S. mid-term elections also dissipated. Notwithstanding its weakest annual return (-18%) since 2008, the S&P 500® posted its first positive (7.6%) quarterly return of 2022. Market strength was broad based, with 10 of the GICS® sectors contributing positively to the overall S&P 500 quarterly performance. From a style perspective, value continued its outperformance versus growth in Q4, ending 2022 with the largest outperformance in nearly two decades. Most S&P 500 Factor Indices posted positive quarterly performance, from defensive-tilted low volatility and quality factors, along with more cyclical high beta and growth factors. Within the S&P Kensho New Economies, 15 of the 25 subsectors had positive quarterly returns, the most since Q2 2021. Given the sanguine performance of U.S. factors, positive exposure to volatility and growth factors was not as detrimental during this quarter as it was in the prior three quarters.
In contrast to the equity and bond markets’ weakness, U.S. Dollar strength has extended into Q3 2022, becoming the longest USD strengthening cycle in its history. The knock-on effects of a stronger dollar have exacerbated the drawdowns (in USD terms) among emerging market equities and have likely influenced their central banks’ fiscal policies. Overall, the macro environment (core rates, oil and inflation, among others) appears to be dictating the markets’ near-term risk appetite. The impact on global energy prices from the ongoing Russia-Ukraine conflict remains in focus, as energy-related themes posted another strong quarterly performance.
Top Three from across the New Economies
Space (18.5%): KMARS, which is primarily composed of Aerospace & Defense sub-industry firms (nearly 58% of the index), posted its best quarterly performance since Q4 2020. The rally was broad, with 29 of the 34 constituents contributing positively to the index performance. Maxar was the top performer (176%), largely owing to a positive reaction to news that Advent International would be taking the company private after a buyout involving a significant premium (link). Boeing was another notable performer this quarter (57%), becoming one of the top three best-performing stocks within the S&P 500. Continued recovery in the air travel industry and robust delivery numbers helped turn the sentiment around Boeing, as it recovered from a four-year low at the beginning of the quarter. Virgin Galactic topped the underperformers list (-26%), extending its downtrend for the sixth consecutive quarter and reaching a historic low. The company’s plans for space travel have been delayed, adding to the cash burn, and reporting a Q3 2022 revenue of less than USD 1 million. After a flurry of SPAC activity in the Space arena, 2022 was a year of consolidation and competition that hopefully will drive the next leg of innovation in this area. The index’s heavy weight toward defense firms also reflects rising national security interests forming a key support for this industry.
Robotics (16.4%): KBOTS had its best quarterly performance in two years, aided by positive performance from 27 of its 35 constituents. Its fourth quarter recovery was strong after ending the previous quarter near a two-year low. Oceaneering Intl., the only stock in the index from the Energy sector (best-performing sector within S&P 500 in 4 2022), was the top contributor after gaining 120% in the final quarter, of which 57% was in the last two weeks of October near the Q3 earnings release (link). The company, in addition to its deep-sea drilling activities, is also involved in defense contracts supporting the U.S. Navy. The biggest index underperformer was Omnicell, a pharmacy inventory management company, which suffered after reporting weak Q3 numbers that have slowed down from their COVID-era forecasts. The index recouped the previous quarter’s loss this quarter but ended the year down (-22%). With a balanced exposure to defensive Health Care Equipment and the more cyclical Industrial Machinery and Life Sciences Tools & Services, the index was less volatile this quarter than most of the other Kensho subsectors.
