Equity indices started the new year at all-time highs but got there on diminishing breadth and elevated valuations. This proved a challenging backdrop as markets faced the triple-threat of a newly hawkish Federal Reserve, war in Eastern Europe, and the resultant possibility of slowing global growth ahead. Although earnings and jobs growth have remained robust, these headline risks took stocks into official correction territory even as bonds recorded one of their worst-ever quarterly performances. Excepting inflation-sensitive commodities, the quarter was difficult for many investors, especially those with more conservative portfolios traditionally tilted towards fixed income, which under performed stocks.

The S&P 500 finished down -4.6% (‘SPY’ ETF proxy) after experiencing a maximum draw down of -12.4% in early-March. In comparison, the technology-laden NASDAQ 100 index was down as much as -20%, finishing the quarter off -8.8% (‘QQQ’). This reflected the relatively rich valuation of growth over value stocks, as well as a general preference for value stocks later in an economic cycle. Overseas issues struggled even more after Russia’s horrific invasion of Ukraine in late-February, as well as China’s major lock down later in the quarter as Covid cases there reached new highs (CNN, “There’s no end in sight for China’s Covid lock-downs,” 4/6/22). Foreign developed nations returned -6.5% (‘EFA’) for the quarter, while emerging markets fell by -7.6% (‘EEM’).

A larger surprise was the rapid and volatile repricing of bonds as heightened inflation persisted and the US Federal Reserve doubled-down on its rhetoric towards reversing its pandemic-era quantitative easing policies. The Bloomberg Aggregate Bond index fell -5.8% (‘AGG’) with longer-duration treasuries performing worse yet. Indeed, it was the worst quarter in fixed income since the early 1980s (MarketWatch, “US Government Bonds Are Having One of Their Worst Quarters Since the US Civil War,” 3/30/22). The only positive standout were commodities, up a whopping +25.4% (‘DBC’) fueled by on-going supply chain disruptions and the Russia-Ukraine conflict’s impact on oil and wheat.

The unique combination of market headwinds has many concerned about the global economy’s future growth prospects (Reuters, “A Recession Shock Is Coming, BofA Warns,” 4/8/22). A brief inversion of the treasury yield curve had pundits particularly abuzz, as it has been a past predictor of many recessions. However, such indicators typically have lead times of a year or more, gross domestic product has been recently strong (US News, “Gross Domestic Product Rose 7%…,” 2/24/22), and first-quarter earnings may again exceed expectations despite rising labor costs (Factset, “S&P 500 Likely to Report Earnings Growth of More than 10% for Fifth Straight Quarter,” 4/8/22). We thus maintain a cautiously positive outlook for markets overall. Meanwhile, our thoughts go out to Ukraine, and be assured we are closely monitoring markets and your accounts during this uncertain period.

Source: Index proxies based on dividend adjusted ETF time-series data from CSI Data, Inc. Data considered dependable, but not guaranteed. Past performance is no guarantee of future performance or profitability. Statements herein do not constitute individual investment advice.