2022 is off to a rocky start with inflation, economic growth, and the trajectory for higher policy interest rates remaining at the forefront of investors attentions. Russia’s invasion of Ukraine and further Omicron outbreaks in China delayed supply chain normalization, while also impacting inflation and economic growth expectations. Inflation concerns have kept the Federal Reserve center stage as they commenced their interest rate rising cycle in March. Navigating rising inflation and slowing economic growth will be a difficult balancing act for global central banks. This macroeconomic backdrop created a more volatile market environment coupled with broad losses across global equity and bond markets.
Q1 2022 Market Commentary
For major equity indices, Q1 2022 was the worst quarter in 2 years. The S&P 500 decreased by 4.6% for the quarter. The overall decline masks the volatility in the market, as markets dropped 5.3% in January and 3.1% in February, before rebounding 3.7% in March. The S&P 500 saw its first correction since the COVID pandemic when the market fell 12.8% from January 3 rd to March 8 th . The gap between value and growth stocks were stark. The Morningstar US Value index rose 2.3% for the quarter, while the US Value index fell 12.2%. Mid-cap value led the quarter, posting a gain of 4.9% and Mid-cap growth led the decline falling 16.4% for the quarter. The value over growth dynamic continues a trend which began late in 2021, reversing a decade long trend of growth over value. Among sectors, energy stocks led the way positing quarterly returns of 38%. Utilities were the sole remaining positive sector generating a 4% return. Among the worst were consumer cyclical (-11%) followed by communication services (-12%) and technology (-10%).
Russia’s invasion of Ukraine in late February caused a global shock to the markets. The grave human implications of the event fed into market sentiment, and further increased equity volatility. Sweeping sanctions against Russia’s banking system, coupled with rising oil prices and supply chain disruptions, amplified existing concerns over inflationary pressures, particularly in food and energy. The All Country World Index (ACWI ex US) fell 5.44% for the quarter. Share prices in China were sharply lower (-14.19%) as COVID 19 cases in Hong Kong and China led to sweeping lock downs. The Eurozone also fell sharply during the quarter due to close economic ties with Russia and Ukraine. Stocks in Europe fell 11.14% during the quarter due to concerns over energy supply.
The long-awaiting interest rate rising cycle commenced during the quarter with the Fed increasing rates 25bp in their March meeting and signaled further rate increases for the remainder of 2022 and 2023. The Fed admitted that surging inflation, driven primarily by supply chain bottlenecks, surging energy prices, and increasing consumer demand, was no longer transitory and committed to reduce their balance sheet over the next few months. The increase in interest rates had a negative impact on bond returns. The Bloomberg Barclays Aggregate Bond Index decreased 5.9%, the worst quarterly decline since 1980.
Oil was in the spotlight throughout the quarter. Prices were already on the rise as the quarter began due to demand from a global economy recovering from a pandemic-induced recession outstripped supply. After Russia invaded Ukraine, the price of a barrel of oil hit a 14 year high of $125. As it became clear that there would not be a serious oil disruption, prices leveled at $100.28 to end the quarter, a 33% increase and the third largest gain in a decade. Natural gas futures rose 51% after the EU said it would cut back on Russian gas imports. Wheat futures also jumped 85%, as both Ukraine and Russia are among the top five exporters of the commodity around the world. These rising commodity prices further increased inflationary fears and concern that rising prices would impact global economic growth for the remainder of the year.