U.S. EQUITY INVESTMENT ENVIRONMENT
The U.S. equity markets suffered significant declines in January as a result of Federal Reserve Chairman Jerome Powell’s historic pivot in monetary policy to a more hawkish stance. Inflation rose to a 40-year high during the 1st quarter. Russia’s invasion of Ukraine on February 24th accelerated losses that led to the S&P 500’s lowest levels since June of 2021. The major averages rebounded mid-March primarily due to China’s promise to support its real estate and internet industries. The S&P 500 ended the 1st quarter down 4.6% thanks to a 3.7% rally in March, while the NASDAQ retreated 9.0%. Value outperformed growth by a large margin as investors favored companies with stable earnings, quality balance sheets, and the ability to generate free cash flow. Large-cap value and small-cap value experienced the narrowest losses while mid-cap growth and large-cap growth suffered the strongest selloffs. Across all capitalization ranges, energy stocks generated the best performance, up 39.1% in the S&P 500 and 43.6% in the S&P Small Cap 600. All other sectors were down except the S&P 500 Utilities sector’s 4.8% gain and the S&P Mid-Cap 400’s Materials sector’s 7.9%. Communication Services, Consumer Discretionary, and Technology stocks were the hardest hit with losses ranging between -8.5% for the S&P 500’s Tech sector to -16.3% for the S&P Small Cap’s Consumer Discretionary group.
INTERNATIONAL EQUITY ENVIRONMENT
International equities performed in-line with the U.S. as the MSCI All Country World ex-USA Index was down 5.4%. The MSCI EAFE Index of developed markets declined 5.9% with the UK’s 1.8% gain its largest positive contributor. European countries, which rely heavily on Russian oil and gas, saw the most severe drawdowns reflected in MSCI Europe Ex-UK’s -10.0% return. Austria finished the quarter at -20.0%, Germany lost 12.9% and Spain outperformed its European counterparts with a 4.1% loss. The MSCI Emerging Markets Index was off 7.0% in the quarter. Russia’s delisting from the MSCI indexes on March 9th resulted in the MSCI Emerging Europe’s drop of 71.0% versus the MSCI Latin America‘s 27.3% gain. Net commodity exporters such as Brazil, Chile, and Columbia that rose 35.9%, 29.5%, and 33.8%, respectively, were responsible for the outperformance. Emerging Asian stocks were off 8.7% with China’s -14.2%, that index’s largest detractor.
FIXED INCOME ENVIRONMENT
Expectations of rising rates sent the Bloomberg U.S. Aggregate Bond Index down 5.9% for the quarter which was its largest loss in decades. The 2-year Treasury ended the quarter yielding 2.28%, and the 10-year Treasury yield finished the period at 2.32%. The 5-year U.S. Treasury bond ended March yielding 2.45%, 13 basis-points higher than the 10-year which some consider a harbinger of recession. Despite uninspiring returns, leveraged loans, short-duration municipal bonds, and U.S. TIPS (Treasury Inflation Protected Securities) were among the best performers with respective returns of 0.02%, -1.6% and -1.7%. Long-term corporate bonds and Treasury bonds suffered some of the steepest declines in response to rising interest rates with losses of -11.2% and -10.6%. Emerging market debt struggled in response to sanctions in Russia and Chinese developer Evergrande’s potential bankruptcy.
Hot inflationary pressures and the war in Ukraine sent commodity prices into a frenzy. The S&P GSCI advanced 33.1% in the first quarter coming off an impressive return of 40.4% in 2021. Energy prices led by coal, oil, and natural gas saw the sharpest increases during Q1 while returns in precious metals were more muted. The price of brent crude started the year at $78.11 and ended the quarter at $107.91. Gold, which is the traditional safe-haven for fighting inflation, took a backseat to oil and natural gas due to soaring demand and limited supply of those commodities.