Q1 2022 Market Update
Two years have passed since spring 2020. Two years since none of us had a clue how long COVID would linger or how quickly today would arrive. Time can confound us that way, managing to crawl and fly at the same time.
Capital markets are often as confounding, as they convert time + human enterprise into investment returns. Scanning analysts’ recaps on the quarter just past, a dominant theme soon emerges: “confusing,” “eventful,” “uncertain,” “complicated,” “extremely volatile,” and “wild ride,” are just a few of the descriptors found. As one analyst summarized:
“The market’s focus on Russia’s invasion of Ukraine is being interrupted by the supply-chain effects of Covid lockdowns in Chinese technology hub Shenzhen, imminent tightening by the Federal Reserve as it tries to catch up with inflation, and the risk to the reflation story as consumer sentiment is crushed by rising prices. The result is a confused, and confusing, market.”
That’s a lot to take in. Which is all the more reason to focus on the lessons time already has taught us about “confused, and confusing” times.
Take, for example, concerns that the recently inverted yield curve for U.S. treasuries and planned increases in the Fed’s target funds rate may signal that a recession is nigh. If it happens, that’s not ideal. However, manageable doses of these same events could be an antidote to painfully high inflation, an eventual boon for shorter-duration bond yields (as described in this Wall Street Journal column by Jason Zweig), and a catalyst for existing allocations to value stocks.
This makes it tricky for investors and markets alike 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. If you need help defining your goals and investment strategy, let's have a conversation.
Equity Markets
In the first quarter of 2022, the S&P 500 was down -4.6% and the Russell 3000 Index finished the month down -5.3%. Small caps felt the brunt of the domestic equity market pullback finishing the quarter down -7.5% (Russell 2000(.
Internationally, markets finished Q1 2022 down -5.4% as measured by the MSCI ACWI ex USA with Emerging Markets finishing the quarter down -7.0%.
Fixed Income and Credit
The Bloomberg Global Aggregate Index (Global Bonds) finished the month down -6.2% as central banks began to raise rates and further interest rate hikes loom on the horizon.
Shorter duration bonds outperformed longer duration with the Bloomberg 1-3 Yr US Treasury Index down -2.5% compared to the Bloomberg 7-20 Yr US Treasury Index down -7.8%.
Corporate Bonds finished the month down -7.7% (Bloomberg US Corp Bond Index).
Municipals were broadly in line with global credit and global fixed income down -6.2% on the quarter.
US Sector Performance
The top-performing sectors in Q1 2022 were Energy (+38.8%) and Utilities (+4.5%). Everything else was down through the quarter.
The worst performing sectors were Communication Services (-12.2%), Consumer Cyclical (-10.7%), and Technology (-9.7%).
Factor Performance
Growth in general dramatically underperformed Value domestically. Large Growth was down -13.6% and Small Growth was down -14.4%. This is compared to Large Value which was up +1.6% and Small Value which was also up +1.6%.
Globally, markets followed suit with Large Growth down -10.7% and Large Value up 2.5%. Global Small Growth was down -13.4% while Small Value was down only -2.9%.
