MARKET INSIGHT Q1 2022
Market Review and Commentary
Equities and bonds both experienced a great deal of volatility since February 24th. The S&P 500 Index closed on February 24th at 4288. Over the first quarter, the stock market has repeatedly and successfully re-tested a market low found around 4200 for the S&P. This occurred in late January/late February, and during the second week of March. At their low, equities have been down as much as 12.82% from their high as indicated by the S&P, and more than 20% for the long-duration, technology-laden NASDAQ. Over this stretch of challenging performance, the advent of liquidity normalization and the invasion of Ukraine have proven to be heavy market influencers.
Markets have been buffeted by volatility—much as we expected this year. We did not expect the source of the volatility to be another Russian invasion (keep in mind this is the third one in that region). As fear spiked, sentiment became bearish, a contrarian positive. Once sentiment gets to extremes, pricing in all kinds of fear, that factor supports limited downside and good things start to happen to forward returns in stocks. As the S&P held at the 4200-support level March 14th, that favorable dynamic kicked in, and markets rallied for the remainder of March, the S&P closing the quarter at 4530, culminating in a 4.6% decline for the full quarter but a 3.3% gain for the month of March.
Bonds have just put in one of their worst quarters ever. Yields have increased across the curve, and there are no major bond asset classes with positive results for Q1. The U.S. Aggregate Index closed the quarter with a 5.93% loss, and the Global Aggregate was down 6.16%. One significant factor driving higher rates will be the fallout from the Fed ending Quantitative Easing (QE). Had we not had QE, Fed purchases, reasonable evidence suggesting long rates, the 10-year Treasury yield, would be something like 3½% today, not the current 2½% zone. Fed liquidity expansion, QE, was the right policy two years ago with the world facing a pandemic. The Fed has ended QE and intends to scramble with Fed-fund rate hikes and balance sheet run-off.
Economic Outlook
Growth momentum remains strong in the U.S. Indeed 2021 witnessed the strongest gain in GDP since 1984. We do not subscribe to the inverted yield curve, imminent recession viewpoint. All the high-frequency data on the ground suggests continued momentum in growth and any talk of recession is premature. This yield curve is not your father’s yield curve as mentioned above. As the Fed removes itself from the market, we expect to see higher rates resulting across the curve, with some steepening or at least a maintenance of the flattish curve we presently have.