U.S. equity funds and stock exchange traded funds suffered an unprecedented slump in net assets over the second quarter of 2022 as markets retreated in face of surging inflationary pressures and growing fears that an increasingly hawkish Federal Reserve would send the economy into a recession.
According to Refinitiv Lipper data, U.S. equity funds’ net assets shrank by $2.1 trillion to $9.2 trillion over the quarter ended June, the biggest quarterly drop on record, Reuters reported.
Among the hardest hit funds, the Vanguard Total Stock Market Index Fund Investor Shares and the SPDR S&P 500 ETF Trust (SPY) lost $77.5 billion and $70.5 billion of their net assets, respectively, while the Vanguard 500 Index Fund Admiral Shares lost $69.3 billion.
Meanwhile, the technology-heavy Nasdaq Composite and the broader S&P 500 Composite index retreated 22.4% and 16.45%, respectively, during the second quarter, suffering their biggest January to June percentage decline since the financial crisis.
U.S. equity mutual funds experienced an average drop off of 15.3% in net assets values for April through June this year.
The risk-off selling pressure has hit U.S. stock markets this year as stubbornly high inflation levels prompted the Fed to hike interest rates in an attempt to cool down rising consumer prices. The Fed has already lifted rates three times this year and is expected to hike rates by another 75 basis points later this month, with some even betting on a possibility of a full one percentage point rise.
Consequently, this series of increasingly aggressive rate hikes has fueled bets that the Fed could send the U.S. economy into a recession.
Looking ahead, Goldman Sachs said in a note that a recession could drag the S&P 500 index down by 19% to 3,150 by the end of 2022 with a sharp contraction in the price-earnings ratio.
“This peak to trough price decline of 34% would be slightly more severe than the historical average recession decline of 30%,” according to Goldman Sachs.
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