To Our Shareholders:
CGM Mutual Fund decreased -13.6% during the second quarter of 2022 compared to a return of -16.1% for the Standard and Poor’s 500 Index (S&P 500 Index) and -4.6% for the ICE BofAML U.S. Corporate, Government and Mortgage Index*. For the first six months of the year, CGM Mutual Fund decreased -9.5%, the S&P 500 Index decreased -20.0% and the ICE BofAML U.S. Corporate, Government and Mortgage Index decreased -10.4%.
Economic uncertainties that emerged early in the year continued to impact stocks into the second quarter. Stocks slumped in early April as the market anticipated aggressive steps by the Federal Reserve to combat rising inflation and the Russian invasion of Ukraine drove up energy prices. Ongoing global supply disruptions were exacerbated by renewed lockdowns in China to combat a resurgence of COVID-19 cases. U.S. employment remained a bright spot in the economy. The Labor Department reported that the March unemployment rate dropped to 3.6% and initial jobless claims in early April fell to their lowest level since 1968. In a separate report, the Labor Department indicated that the Producer Price Index jumped 11.5% in March for its fourth consecutive month of double-digit gains and further evidence of escalating inflation. Earnings reports generally signaled surprisingly strong corporate profits, briefly propping up the market in mid-April. Supply chain constraints, reduced inventory investment and diminishing government stimulus contributed to the contraction of U.S. GDP at a 1.6% annual rate in the first quarter. Rising bond yields and plummeting technology stocks pushed the S&P 500 Index down 8.7% in April for its worst monthly
performance since the onset of the pandemic in 2020.
In early May, the Fed aggressively responded to escalating inflation with the approval of a 0.5% interest rate increase and the announcement of plans to begin reducing its $9 trillion asset portfolio starting in June. Stocks initially surged in response but plunged over the following several days as technology and bank stocks suffered. Another strong employment report from the Labor Department stated that in April the U.S. economy added in
excess of 400,000 jobs for the twelfth straight month. But the market selloff continued through the first half of the month on indications of widespread inflationary pressures, disappointing earnings reports from large retailers and concern that China’s COVID restrictions would reduce demand for oil and other commodities. Stocks recovered much of their losses late in the month as the consumer discretionary and financial sectors rallied. In late May the Commerce Department reported that consumer spending increased in April for the fourth consecutive month. The news boosted the market to its best weekly performance of the year before stocks pulled back on May 31 resulting in a modest 0.2% monthly increase for the S&P 500 Index.
Volatility persisted into June as the market weighed conflicting indications of consumer strength and a stagnating economy. Recession fears increased when the Labor Department reported the Consumer Price Index for May increased 8.6% from the previous year. Accelerating prices for energy and groceries were the main contributors to the CPI’s expansion to its highest level since 1979. The market plummeted in response and on June 13, the S&P 500 Index entered into its first bear market since 2020, closing more than 20% below its January record. Stocks briefly rebounded when the Fed raised interest rates 0.75%, bringing the benchmark rate back to its pre-pandemic level. But by the middle of the month, the market suffered its worst weekly performance since March 2020 as the energy sector plunged and falling home construction and retail spending figures projected diminishing economic growth. Stocks sagged through the end of the month as the University of Michigan reported its consumer sentiment index dropped to a record low and the Conference Board followed with its report that consumer expectations for the short-term outlook on income, business and labor market conditions fell to the worst level in over nine years. By quarter-end Commerce Department figures suggested a slowdown in consumer spending and the S&P 500 Index closed with its worst performance for the first six months of the year since 1970.
The 10-year U.S. Treasury bond yielded 2.3% at the beginning of the quarter and climbed as high as 3.5% on June 15 before finishing the quarter at 3.0%. The yield rose in response to rising inflation and pulled back late in the quarter as stock market declines drove investment to the safety of government bonds. The S&P 500 was priced at 24.1 times the trailing twelve-month earnings at the end of the quarter. Despite the market downturn, stocks remain expensive, but we believe that companies with low valuations in several market sectors offer substantial growth opportunities.
On June 30, 2022, CGM Mutual Fund was 32.5% invested in short-term U.S. Treasury securities. The three largest industry positions in the equity portion of the portfolio were in oil and gas – independent production, metals and mining and health care services. The Fund’s three largest equity holdings were Coterra Energy Inc. (CTRA, Financial)(oil and gas – independent production), Signet Jewelers Limited (SIG, Financial) (retail) and Antero Resources Corporation (AR, Financial) (oil and gas – independent production).
David C. Fietze
President
July 1, 2022
This report has been prepared for the shareholders of the Fund and is not authorized for distribution to current or
prospective investors in the Fund unless it is accompanied or preceded by a prospectus.
