The highlight of the first quarter of the year for most sports fans is “March Madness,” which occurs during the NCAA basketball tournament. Well, unfortunately, the madness in the markets, economy, and the geopolitical environment started much earlier in 2022. Jitters began in January with concerns about spiking inflation and the potential for significant Federal Reserve interest rate hikes. After U.S. stocks dropped almost 10% during the month, there was a recovery towards month-end. This short-term optimism was quickly squelched by the eroding relationship between Russia and Ukraine. Markets began anticipating a military conflict, and the declines continued, causing February to be another negative month. They say that Spring is the season of rebirth, joy, and love. As we transitioned from Winter to Spring, the markets began to perk up, and March ended the two-month losing streak, returning about 3% for the broad U.S. stock market.
Despite the madness of the first quarter, there are quite a few reasons for optimism as we move forward in 2022. Job growth remains very strong, with the unemployment rate dropping to 3.6%. While we’ve learned to never assume that Covid-19 is “old news,” it appears to have mostly run its course for now. Corporate earnings came in strong in the fourth quarter of 2021, and while that trend may have slowed some over the last three months, there is still momentum in the economy. Despite the challenges, corporations, for the most part, are thriving. The supply chain issues have not completely gone away, but there seems to be an improvement on that front. Oil prices were approaching $130/barrel in early March and are now close to $100/barrel. It’s still painful to fill up an automobile with a tank of gas, but it is likely that there will be some relief later in the year.
The Beatles sang, “Here comes the sun….and I say, it’s all right.” There is no way to tell what the next few months or even years will be like, but history tells us that markets tend to be positive if an investor’s time horizon is at least 5-10 years. To achieve a good long-term result, we all must endure bad months and bad quarters from time to time; however, our team at Waverly Advisors continues to position portfolios to generate long-term returns that are commensurate with the risks being taken.
To continue the basketball analogy referenced earlier, the first quarter was a rarity in that all broad capital markets experienced double dribbles, personal fouls, and missed free throws. One of the areas where the referees’ whistles were the loudest was fixed income. Bond investors responded to rising inflation expectations and the Federal Reserve’s comments about future interest rate hikes by pushing yields much higher. In the long run, higher yields are a good thing for bondholders because the amount they collect in interest income increases; however, this transition from low yields to higher yields can be temporarily painful. For the three months ending March 31, 2022, the Bloomberg Aggregate Bond Index declined by 5.9%. This three-month return is far worse than any year the bond index has ever experienced; however, it does improve the outlook for the future, especially if inflation is brought under control in the next 12 months. Global equity returns, as measured by the MSCI All-Country World Index, declined by 5.4%, with U.S. stocks performing a little better than international stocks. Despite a difficult first quarter, the 3-year, 5-year, and 10-year results for diversified portfolios continue to be strong, reinforcing the notion that investors must have a reasonable time horizon to “cut down the nets.” In a thrilling comeback, the Kansas Jayhawks overcame a 15-point halftime deficit to beat the North Carolina Tarheels. The markets may require a little more time to get back on track, but when we look out over the next few years, hope springs eternal.