A volatile quarter has just come to a conclusion. Just when investors were hoping that 2022 would be a year of smooth, post-Covid normalization, things got funky (again). Supercharged global inflation and Russia’s invasion of Ukraine were enough to shake things up. While we learned that the new Omicron COVID strain wasn’t going to shut down the economy, we also learned the U.S. Federal Reserve is very serious about jacking up interest rates sooner-than-later.
Reading some of the analyst recaps from the past couple of months, I see words emerging such as “confusing”, “eventful”, “uncertain”, and “wild ride”. With those descriptions in mind, let’s see how some of the major market components did in Q1 and over the past 365 days:
|S&P 500 Large Cap Index
|S&P Small Cap 600 Index
|S&P Developed BMI International Index
|S&P U.S. Aggregate Bond Index (total return)
|S&P Municipal Bond Index (total return)
|Dow Jones Equity All REIT Index
|Dow Jones Commodity Index (total return)
SOURCE: DOW JONES, DATA AS/OF 3-31-2022 (DOESN’T INCLUDE DIVIDENDS UNLESS NOTED). HERE IS A COMPREHENSIVE LIST OF RETURNS.
Looking back, here are some observations.
In Q1, we saw a decent March but it wasn’t enough to overcome a slow January and February. At the end of the day, most stock indexes were negative for the quarter – the worst quarter since the coronavirus in Q1 of 2020.
Commodities was the place to be! We saw seismic increases in oil and gas prices, and in general, most commodity indexes. We’re seeing things like wheat, corn, metals, and cotton all experience pricing spikes. Commodities had their best quarter in 30 years.
On a sector level, only 2 of the 11 sectors in the S&P500 finished positive for the quarter. Energy was a clear standout, as the sector benefitted from the geopolitical uncertainty and surge in oil and natural gas prices. Utilities also logged a positive three months, which served as a defensive sector play.
Technology and communication services were relative underperformers, as there was a broad rotation out of growth and highly valued companies. So as developed “value” companies were flat, developed “growth” companies were down nearly 10%.
Foreign markets declined in the first quarter as well. Europe is a huge importer of oil from Russia, so they were vulnerable to geopolitical conflict. Higher oil prices there could cause their economy to slow, time will tell.
But what took place in emerging markets was unprecedented. Because of Russia’s so-called “special military operation” in Ukraine, they’ve been hit with unprecedented sanctions. Russian companies have been removed from trading in London and New York, and they continue to get shut out of other financial matters from all directions.
The bond market suffered its worst quarter in decades, as inflation hit a 40-year high. The benchmark 10-year Treasury bond jumped from 1.51% to 2.32%, as the Fed attempts to curtail inflation. What that means in simple terms is as bond yields rise, the value of the bonds (aka prices) decrease. So investors saw their bonds depreciate over the quarter.
The last week of March also saw the dreaded – albeit brief – “inversion” of the yield curve. Some analysts say the U.S. inverted bond yield curve that has been a precursor (but not guaranteed) of economic recessions. It is the first time that has happened since 2019. The Fed is woefully behind the curve in fighting inflation, but at least they are now aware.
So is there any good or positive news, you may ask? Well, here’s something: geopolitical crises have often had a sharp but relatively short-term impact on markets. I’d say it’s important to avoid the risk of panic selling and potentially being whipsawed!
In addition, we can look ahead for opportunities. For instance, many see an energy shift that will force governments to accelerate their energy transition plans to clean technologies. These are things like solar, wind, and electric vehicles. We can even dig further and find the commodities powering those technologies (i.e. lithium, nickel) and the mining industry could benefit over the coming decade or two.
There is little doubt that the current market environment is complex. This makes it tricky for investors and markets alike (which, after all, are merely a construct of our own devise) to sort out what even qualifies as “good” and “bad” news from one moment to the next. This likely translates into the volatile market pricing we’ve seen of late.
Fortunately for disciplined investors like us, it’s unnecessary to get swept up by erratic signals, or tricked into assuming a false sense of urgency. Today more than ever, we believe it makes the most sense to keep our eyes and your investments focused on the horizon of your goals. This means continuing to deploy the same core principles we use across time and through various market conditions.
If your portfolio is well-structured, you should already be positioned as effectively as possible in the face of future unknowns. At this current time, your investments should already be appropriately allocated among the push-and-pull concerns related to potential inflation, rising interest rates, recessions, etc. The popular opinion is that we should expect to see multiple rate hikes through 2022, which comes with its own set of pros and cons.
Even a best-laid plan doesn’t guarantee success. But it serves as the most logical course toward your end goals. Consider, for example, this inspiring sentiment from a real-life “Queen’s Gambit” Brazilian chess champion Cibele Florêncio:
“Don’t underestimate the pawn. … You get it to the other side and it can become a queen.”
As always, we look forward to our next conversation with you. In the meantime, remain patient. Rest assured we’ll help you successfully navigate this market environment.
Disclaimer: This information contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the advisor. The information should not be construed as legal, tax, nor investment advice. Never make investment or financial decisions based on information provided here, without first consulting with your professional investment advisor. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Dow Jones. Data is taken from sources generally believed to be reliable, but no guarantee is given to its accuracy.