On this episode of KayneCast, Jordan Greenhouse, Managing Director with Kayne Anderson Rudnick, is joined by Chris Wright, Portfolio Manager and Senior Research Analyst for KAR’s Long-Short Portfolio. Wright offers an overview of the equity market for Q2 and the direction he expects to see the Long-Short Portfolio go in the third quarter.

Energy Stocks Buck Demand Destruction in Q2 2022 

Wright notes, “the Russell 3000 declined almost 17% as fear of a recession due to tightening monetary policy gripped the markets.” Consumer Discretionary, Information Technology, and Communications services were down more than 20%, while Utilities and Consumer Staples were down 5%. Wright believes it is worth noting that “the smallest market cap stocks declined nearly 2x the market (down 34%) while large cap stocks did slightly better than the market decline.” The market decline is unsurprising and reflects typical investor positioning when facing a possible recession.

Surprisingly, energy stocks remained strong, only dropping 6% in Q2. Typically, fears of a recession drive demand destruction in the energy sector, but the market seems to believe the “supply of energy will remain even tighter due to the war in Ukraine and lack of replacement supply from other energy-producing countries.”

Q3 2022 Outlook for Long-Short Investments 

Moving into the third quarter, Wright is monitoring interest rates, consumer spending, and the impact of inflation on profit margins. He expects stock market volatility will remain high due to moves in the yield curve, which has “steepened on the short-end but at times has inverted, which is closely associated with a recession in the near future.”

As skittish investors seek to maximize their Long-Short term investment options, Wright expects to see short-term market moves due to high-interest rates and inflation. Wright recommends remaining aware of the current economic environment in which companies operate and seeking to include companies with the pricing power to weather supply chain and input cost inflation while insulating profit margins from higher costs.

Listen to the podcast above to learn more about the performance of the Long-Short Portfolio in Q2 2022, and join us in Q3 for another market performance review.

Learn more about the Kayne Anderson Rudnick Long-Short Portfolio today.