War & Inflation
The first quarter of 2022 was unsettling and volatile, both globally and for financial markets. There were few safe havens as both stock and bond markets in the US and abroad faced declines. The double-whammy of domestic inflation concerns and war in Europe was enough to finally end the Covid-relief rally that began in mid-2020.
Despite the increased market volatility, US stocks ended the quarter with only a small decline. The S&P 500 index closed at a new all-time high on January 3rd, the first trading day of the year, before reversing and beginning to slide. A slight recovery took hold at the end of January, leading to a volatile February that trended downward until we reached mid-March. Oil prices, which had risen steadily through the start of March, began backing off, granting some relief and contributing to a recovery in stocks the last two weeks of the quarter.
International stocks fared better than domestic equities at the start of the quarter. Unfortunately, the impact of Russia’s activities has been felt throughout Europe, taking a toll from a humanitarian perspective and a financial one. Non-US stocks rallied at the close of the quarter, mirroring their domestic counterparts, to end with a loss of 5.91%.
Fixed income investments experienced one of their worst quarters in recent memory. As interest rates shot up, bond prices adjusted downward, leading the Bloomberg US Agg bond index (AGG) to a decline of 5.93% for the quarter. Fortunately, prices should work their way back as the underlying bonds mature and new fixed income investments issued at higher interest rates provide increased income.
The Fed recently implemented its first rate hike since 12/2018 as it attempts to slow the economy slightly to combat inflation. It is currently anticipated that the Fed will increase the federal funds rate by .25% at each of their next six meetings this year, with possibly more to follow next year, depending on the state of the economy. These future increases have largely been priced in to fixed income investments, driving much of the declines mentioned above. The changes brought with them a large jump in mortgage rates – whether it cools the residential real estate market is set to be seen. On the positive side, money markets and savings accounts should start to increase their interest payments in the coming months.
March 13 marked two years since the coronavirus pandemic was declared a national emergency. While the US is largely moving on thanks to declines in severe cases, there are continued challenges in other parts of the world. Supply chain disruptions and production backlogs are persisting longer than originally anticipated and impacting many industries. This continues to be a major driver of the recent headline inflation, indicating it may persist at the current level for at least a few more months before rolling over – the key for now is patience.
We hope you have a wonderful Spring and enjoy the warming weather! As always, please let us know of any questions or concerns.
The PWM Team
