Market Commentary – April 2022

Well, that could have gone better. Better that is in terms of first quarter 2022 stock and bond market returns, world peace, the price of oil, an awards show joke about Alopecia and the fact “transitory” inflation is not transient. Thankfully food and energy prices are not included in the government’s calculation of the core inflation number or that would have been the cherry on top of a bad quarter.

US Treasury bond yields rose significantly in the quarter on inflation fears and the Fed’s stated intention to raise the Federal Funds Rate aggressively the remainder of 2022. These two factors and others led to the worst quarter for the US bond index in more than 40 years, signaling an end to a multi-decade bond bull market.  The aggregate bond index returned -5.9% and the two-year treasury yield jumped from 0.73% to 2.33% at quarter end. Five- and ten-year yields moved higher but not at the rate of the two year thus flattening and almost inverting the yield curve.  An inverted yield curve (shorter maturity bonds yield more than longer maturity bonds) has not historically been a harbinger of strong near-term economic growth.

Shorter term bonds outperformed the index but were still negative. Inflation protected securities held up well (-0.3%) and were positive until a sell-off the last two trading days of the quarter.  Even the non-investment grade bond index fell significantly -4.8% despite the lack of significant defaults.

The overall stock market managed a positive March, but still posted a -4.6% return for the first quarter. Only investors focused on the energy or utility sectors of the overall market, experienced positive returns as the other nine market sectors were negative. The Communications Services sector was down 12% thanks to its’ largest constituent, Facebook, which tumbled -34% during the quarter. The market did rotate to value stocks (energy and utilities) as the value index fell -0.7%, which looked downright spectacular compared to the -9% return for growth stocks. As usual, small-cap and foreign equity indices once again trailed the S&P 500 for the quarter. Emerging market stocks got even cheaper thanks to a rising US dollar and poor returns out of China and Russia.

Commodity returns and broad commodity funds did well in the first quarter fueled by rising energy, agriculture, and precious metal prices. Many of these funds returned 20%+ in the quarter. Gold bugs can smile again as inflation fears and geopolitical strife led to the precious metal moving up 3% while many leveraged golds company stocks moved significantly higher. Oil rose 32% in the first quarter. The initial move higher was attributed to inflationary worries and lack of production and was further exacerbated by the Russian invasion of Ukraine and the resulting sanctions.

According to the U.S. Energy Information Administration, the U.S. increased domestic oil production every year from 2008 thru 2019. Covid-19 impacted 2020’s production, but in 2021 domestic oil production dropped below both 2019 and 2020 levels. Thus far in 2022, monthly production has fallen even more. Perhaps we should make sure we have all the clean green energy we need before further restricting the oil and gas industry?  Cart before the horse?

We see more inflationary concerns ahead particularly in agriculture and retail food prices.  Multiple interest rate increases will put added pressure on growth stocks and raise borrowing costs for families and corporations.  With that said, opportunities do exist, and client portfolios will be further tilted to floating-rate bonds and  value stocks.  A higher commitment to foreign equities is unlikely and this category will continue to be underweighted in portfolios. We close with the following data from Goldman Sachs Asset Management; since 1969 a portfolio comprised of 60% S&P 500 Index and 40% Aggregate Bond Index has posted positive returns over rolling one-year periods 86% of the time and five-year periods 99% of the time.  Patience and opportunity equal higher returns.