Planning matters

2022 First Quarter Market Review and Looking Ahead

After another positive year of equity returns in 2021, the first quarter of 2022 saw negative returns in both equity and fixed income markets. While many economists were anticipating the challenges of high inflation and continued supply chain disruptions to begin easing in 2022, the Russian invasion of Ukraine exacerbated both market headwinds. Additionally, in January, the Federal Reserve began projecting a faster rate of interest rate hikes to combat inflation; the position shift weighed heavily on both equity and fixed income returns.

Quarterly Market Performance Q1 2022

Source: Morningstar, as of March 31, 2022

As the above returns show, Fixed Income investments declined by just over -5% on average in Q1 2022. While bonds typically provide downside protection in diversified portfolios, rapidly rising interest rates from historically low levels have prevented that from happening so far this year. Investing in Treasury Inflation Protected Securities (TIPS), shorter maturity bonds, and high yield bonds, helped limit some downside to date in 2022. In addition, having a portion of fixed income allocations in commodities has further reduced negative returns. Ultimately higher yields will be beneficial for investors and navigating that transition can be complicated.

Equities were also down by -5% on average. Growth stocks, which outperformed through much of the pandemic, are down close to -12% and underperformed for the quarter and for the trailing one-year time frames. More reasonably priced value stocks have outperformed the broader market with modestly positive returns in Q1. Having a portfolio bias toward value stocks helped reduce but not eliminate negative equity returns year-to-date.

In January, both Developed and Emerging Market equities, outperformed the U.S. stock market due to more reasonable valuations and in anticipation of a receding pandemic. However, the invasion of Ukraine and rising energy costs are expected to affect Europe more directly, leading to a more cautious view of international stocks.

Economic Growth – Slowing but Still Above Average

Russia’s invasion of Ukraine added an additional layer of complexity to a business cycle already challenged by a global pandemic and caused economists to reduce both global and domestic growth projections.  However, economic growth in the U.S. is expected to continue at an above average pace in 2022 and possibly longer:

Source: Morningstar and U.S. Bureau of Economic Analysis, as of March 31, 2022.

As markets adjust to renewed geopolitical uncertainty, the U.S. pandemic related economic impacts continue to fade. Hotel occupancy, restaurant occupancy, and airline travel numbers are nearing pre-pandemic levels. The unemployment rate fell to 3.8% in February, and we may see continued strong wage growth with 5 million more job openings than unemployed workers. Additionally, corporations are able and willing to pay higher wages due to above average profit margins and revenues.

While the 5.7% GDP growth of 2021 will not be repeated in 2022, the overall economy is expected to experience continued above average growth despite additional challenges.

Declines are a Normal Part of the Investment Cycle

In a typical year, it is normal for equity markets to experience one -10% correction and declines of -5% three times per year as you can see from the below chart. Equity markets have already experienced a decline of -5% and -10% respectively in 2022 and markets may continue to be volatile for the remainder of this year.

Source: Capital Group

As global markets attempt to transition to a post-pandemic world, we are staying focused on strategically positioning portfolios for the current economic environment and helping you plan for 2022 and beyond. If you have questions on how the current economic environment is affecting your individual situation, please contact your Planner.

Written By Lynn Snyder, CFA