1Q 2022 Market Summary
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Stock and bond markets saw a challenging first quarter of 2022 amid Russia’s invasion of Ukraine and the highest inflation seen in the US in 40 years. Global economic uncertainty drove stocks into correction territory during the quarter, while bonds saw one of their worst quarters on record as the market adjusted to expectations for a rapid increase in interest rates.
A spike in inflation was the driving economic story in the first quarter. Certain factors of inflation—such as car prices, surging pandemic-driven demand of durable goods, and general supply-demand imbalances—may prove transitory and offer a reprieve to inflation as the supply chain normalizes. However, higher mortgage rates, rents, and wages, combined with reduced supply of energy and other commodities from Russia, may provide a floor to inflation levels in the near term. The Federal Reserve faces a challenge this year in its attempts to seek a “soft landing,” raising rates enough to moderate inflation, but not so much as to drive the economy into recession. Macro-economic factors are difficult to predict, but sustained inflation and prolonged global conflict would be headwinds for the growth of the global economy.
The price-earnings ratio (P/E) of the S&P 500 Index fell from the start of the year, but the index ended the quarter at just under 20 times next year’s earnings, still above historical averages. Earnings growth may be muted this year as most companies will face higher input costs and potentially slowing demand. Energy and other commodity companies should see significant earnings growth from higher prices, as reflected by the strong returns for these sectors so far this year, but these sectors make up only small portions of global indexes.
We believe these conditions warrant a cautious approach but remain encouraged that a long-term perspective and emphasis on durable, high-quality investments will help weather any near-term challenges.
Economic uncertainty weighed on stocks to start the year. The S&P 500 fell by as much as 11.5% during the quarter, but stocks recovered some of their losses during the last half of March, and the index finished the quarter down 4.6%. Growth stocks fared much worse than their value counterparts. The Russell 1000 Growth Index fell 9%, while the Russell 1000 Value Index declined less than 1%. The energy sector buoyed value indexes, as the S&P Energy Sector returned 39% in the first quarter, making it the only major sector with positive returns.
The Russell Mid Cap Index and the Russell 2000 Index of small companies saw declines of 5.7% and 7.5%, respectively. In overseas markets, the MSCI EAFE Index of developed nations fell 5.9% and the MSCI Emerging Markets Index fell 7%.
Bond prices struggled due mainly to rising interest rates. Both the 2- and 10- year Treasury rates rose dramatically, ending the quarter at 2.28% and 2.32%, respectively. The Bloomberg US 1-3 Yr. Gov’t/Credit Index (a typical benchmark for short-term bond funds) lost 2.5% of its value during the quarter. The Bloomberg US Aggregate Bond Index fell 5.9%, marking its worst quarterly return since 1980. The Bloomberg High Yield Corporate Bond Index fell 4.8% and the Bloomberg US Municipal Index fell 6.2%.
The Bloomberg Commodity Index returned 25.6% in the first quarter, as oil prices rose from $75 to $100 per barrel. Gold prices, as measured by the LBMA Gold Price Index, increased 7.6%.
The Standard & Poor’s 500 Index, often abbreviated as S&P 500, is an American stock exchange market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices.
The S&P 500 Energy comprises those companies included in the S&P 500 that are classified as members of the GICS energy sector.
The Russell 1000 Growth Index is a broadly diversified index predominantly made up of growth stocks of large US companies.
The Russell 1000 Value Index is a broadly diversified index predominantly made up of value stocks of large US companies.
The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The index is maintained by FTSE Russell, a subsidiary of the London Stock Exchange Group.
The Russell Microcap Index measures the performance of the microcap segment of the US equity market. It includes 1,000 of the smallest securities in the Russell 2000 Index based on a combination of their market cap and current index membership and it also includes up to the next 1,000 stocks.
The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. and Canada.
The MSCI Emerging Markets Index is an index designed to measure equity market performance in global emerging markets.
The Bloomberg US 1-3 Year Treasury Bond Index measures the performance of the US government bond market and includes public obligations of the US Treasury with a maturity between 1 and up to (but not including) 3 years.
The Bloomberg US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.
The Bloomberg US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.
The Bloomberg Global High Yield Corporate Bond Index is a rules-based market-value-weighted index engineered to measure the below-investment-grade, fixed-rate, global corporate bond market.
The Bank of America Merrill Lynch High Yield Bond Index tracks the performance of below-investment-grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market.
The Bloomberg US Municipal Index covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and prerefunded bonds.
The LBMA Gold Price Index is the global benchmark for unallocated gold and silver delivered in London.
The West Texas Intermediate (WTI) oil, also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content.
Bloomberg Commodity Index (BCOM) is calculated on an excess return basis and reflects commodity futures price movements.