Quarterly Market Review 2022 Q1

Below is a snapshot of key top-line economic indicators:

2022 Q1 Market Snapshot

2022 got off to a bumpy start in the U.S. with inflation continuing to climb (ending Q1 at 7.9%) and the Federal Reserve raising interest rates for the first time since 2018.

Russia’s invasion of Ukraine in late February caused global concern and sparked the fastest growing refugee and humanitarian crisis within Europe since World War II. The subsequent increase of global geopolitical pressure further contributed to market volatility and concerns around the world.

As a result of these factors, both stocks and bonds, which typically move in opposite directions, both finished down in Q1.

The combination of geopolitics, inflation, and rising interest rates that caused the volatility investors experienced in Q1 is likely to continue.

Here's a quick look at returns in the first quarter of 2022:

U.S. Stocks

U.S. stocks fell in the first quarter of 2022, finishing down 5.3%. It was a more volatile quarter, but the U.S. stock market recovered fairly well by the end of the quarter, cutting much of the losses since the start of the year. Still, U.S. stocks finished the quarter up 12.3% from one year ago and are up 18.3% per year for the last three years.

International Stocks

International stocks fared best (least worst) across the globe. In Emerging Markets, resulting from its invasion of Ukraine, Russia’s stock market closed for nearly a month amid sanctions imposed on the country. Restrictions remain on trading the Russian securities, and most Russian equity holdings have been written off as worthless. This geopolitical pressure this causes will likely to continue to impact global markets.

Fixed Income

While stock market volatility captured headlines, the bond market saw its worst quarter on record. With continued upward pressure on inflation, the consumer price index (CPI) registered its biggest increases in 40 years. With inflation at 7.9% – well above the Fed’s 2% target rate – the Fed raised the Federal Funds rate by a quarter point in Q1 and laid out plans for six more rate hikes in 2022.

Short- and long-term bond yields jumped to their highest level in years, and the bond market suffered as a result (when interest rates go up, bond prices go down). Longer-term bonds, which are most sensitive to interest rate changes, were hit hardest. With inflation staying stubbornly high, U.S. Treasury Inflation-Protected Securities (known as TIPS), fared best of bonds in Q1.

As you can see in the graph of yield curves below, the gap between short- and long-term Treasury yields also leveled out in a trend known as a “flattening yield curve”. In the days since the close of Q1 the yield on the Treasury two-year note exceeded that of the 10-year, causing an inverted yield curve. Inverted yield curves may be an indicator of a possible recession in the next 12-18 months.