April Market Perspective
1Q2022 in Review
After a relatively calm 2021, volatility in the global equity markets returned in the first quarter of 2022. This volatility was bought on by inflation that surged to a 40-year high, the Federal Reserve stated intent to raise interest rates faster than previously thought and Russia’s full-scale military invasion of Ukraine. These factors fueled a rise in volatility and pushed stocks lower in the first quarter of 2022.
All four major U.S. equity indices posted negative returns for the first quarter of 2022, although the S&P 500 and Dow saw only mild losses compared to the NASDAQ and Russell 2000 (small capitalization stocks). Investors rotated out of growth-oriented, technology stocks in favor of less expensive value stocks, such as financials and energy stocks. Accordingly, value stocks dramatically outperformed growth stocks over the previous three months.
In the face of rising inflation and the Federal Reserve who has consistently signaled that it was going to raise interest rates faster than investors had previously expected, the U.S. bond market posted one of its worst quarterly performances in many years. As expected, shorter-duration bonds outperformed longer-duration bonds (duration is a measure of a bond’s sensitivity to changes in interest rates) as rising inflation weighed heavily on the longer-duration issues.
Investment-grade corporate bonds posted negative returns and underperformed lower-quality but higher-yielding (junk bonds) corporate bonds, which also declined in value but more modestly so. This underperformance of investment-grade bonds reflected the impact of rising Treasury yields, while the outperformance of high-yield bonds serves as a reminder of the still-positive outlook for the U.S. economy and corporate America, despite the macroeconomic headwinds of inflation, geopolitical unrest, and rising interest rates.
Last quarter was especially challenging given the “risk-on, risk-off” theme of the U.S. stock and bond markets, vacillating from “buy on the dip” and “sell into the rally.” Day-to-day performance varied widely often with the news headlines of the day.
There is little question that investors continue to face uncertainty as we enter the second quarter 2022, as headwinds noted above remain in place. As such, we do expect continued volatility across most asset classes in the short term. It is important for investors to remember that volatility works in both directions – up and down – and that with volatility often comes opportunity.
While there are risks to portfolios as we start the second quarter, it is important to note that the U.S. economy is very strong, and unemployment remains historically low. Interest rates are rising but remain far below levels where most economists forecast that they would begin to slow the economy. And consumer spending, one of the main engines of growth for the U.S. economy, is robust, and corporate and personal balance sheets are healthy.
The outlook for the investment markets and the economy is uncertain, and we should all expect continued volatility in the short run. But core macroeconomic fundamentals remain very strong while U.S. corporations and the U.S. consumer are financially healthy. So, while risks remain, as they always do, there are also multiple positive factors supporting the markets, and it is important to remember that a well-diversified, long-term portfolio can overcome bouts of even intense volatility like we saw in the first quarter.
Rest assured that our team, supported by Commonwealth and our research partners, remain dedicated to helping you navigate this market environment.