Economic Update 2022
The war in Ukraine, surging inflation and rising interest rates led markets lower in the first quarter. After a strong 2021, US equities saw its first quarterly loss in two years. During the quarter at its worst, US equities fell 13% and thus into official correction territory (defined as a drop of 10%). While this may be shocking, it remains in line with historical intra-year declines. Since 1980, despite average intra-year drops of 14.0%, annual returns were positive in 32 of 42 years. Despite ongoing uncertainty, US equities staged a strong late rebound of nearly 9% to end the quarter at -4.6%.
Elevated valuations and rising interest rates hurt long-duration growth stocks. The gap between value and growth stocks across size and style was stark and was significantly in favor of larger and value-oriented segments. Large cap value stocks outperformed large cap growth by 8.3%.
Within international equity markets, both developed and emerging markets fell 5.8% and 6.9% respectively in 1Q22. The conflict in Ukraine weighed heavily on European markets, given its reliance on Russian energy. Additionally, emerging markets, particularly China, struggled as continued COVID-19 lockdowns remained highly disruptive to its economy.
Bonds had their worst quarter in 20 years. US bonds fell 5.9% in 2022 as interest rates rose after the Federal Reserve set out on a more aggressive path to tame inflation. Despite higher inflation, TIPS also fell 3% due to rising rates. Longer-term Treasuries, which have the greatest sensitivity to interest-rate changes, were the hardest hit and fell 10.6%. US high yield bonds fell 4.8% due to the flight to quality stemming from the Russia-Ukraine conflict. Lastly, a stronger dollar and inflation woes also led international bonds lower for the quarter.
Commodities were the biggest winners as the war in Ukraine fueled further inflationary pressures leading to a surge in oil and grain prices. Gold gained 6.6%, living up to its reputation as a safe haven during the market selloff. Expectations for higher interest rates in the US led the dollar to rally 2.6%. After a record 2021, US REITs lost 5.3% over concerns of rising costs due to higher interest rates. However, gains were recorded within subsectors such as hotels and offices, as they continue to benefit from easing economic restrictions.
We expect continued market volatility until the Ukraine invasion reaches some resolution or there is a declared winner. We believe the U.S. economy remains strong, and when the Eastern European conflict is resolved, the markets will react favorably. This argues for remaining invested, riding out the recent decline in order to fully participate in the future recovery. As always, if your financial circumstances have changed and you wish to review your portfolio, please call to set up a meeting. We appreciate your continued loyalty and confidence.
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Investors cannot invest directly in indexes. The views stated in this letter are not necessarily the opinion of SagePoint Financial, Inc. and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards. A diversified portfolio does not assure a profit or protect against loss in a declining market.
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The MSCI ACWI (All Country World Index) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets.
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