Global markets mostly fell to start out the year as geopolitical events took center stage in the first quarter of 2022. Continued elevated inflation figures and the Federal Reserve’s less accommodative monetary policy stance remained acutely in focus by investors. Against this backdrop of uncertainty, economic data largely remained strong during the quarter.
• Russia’s invasion of Ukraine on February 24, 2022, amplified global stock and bond market volatility that was already heightened to start the year. The invasion was swiftly followed by wide-ranging sanctions imposed on Russia by the U.S. and its allies. Given Russia’s status as a large commodity exporter, particularly oil and natural gas, the invasion and consequential sanctions sparked concerns about how potentially higher energy prices may impact input prices and the global economy. As referenced in our March 2022 investment letter, An update on markets and the Russia-Ukraine conflict, we believe markets have the resiliency to recover from this geopolitical shock. In fact, it’s interesting to note that the S&P 500, representing domestic large-cap stocks, was down roughly -11% from the start of the year to the day before the invasion. Since the invasion to the end of the quarter, the S&P 500 returned approximately +7%.1
• Inflation remained elevated during the quarter as the U.S. Bureau of Labor Statistics reported, “The Consumer Price Index for All Urban Consumers increased 0.8 percent in February on a seasonally adjusted basis after rising 0.6 percent in January. Over the last 12 months, the all items index increased 7.9 percent before seasonal adjustment.” Gasoline, shelter and food were the biggest contributors to the CPI increase during the month.2 The Russia-Ukraine conflict adds further uncertainty to the inflation outlook in the near-term; however, we advise maintaining a long-term perspective recognizing that elevated inflation does not necessarily translate to impending stock market weakness.
• The Federal Open Market Committee (FOMC) announced a much anticipated 0.25% increase in the federal funds rate at its March meeting. The FOMC believes that the domestic economy is in a position of strength and can handle higher interest rates. Although the FOMC also indicated that additional federal funds rate increases are likely on the horizon, the committee asserted that it will be nimble in its stance and rely on incoming information regarding the economic outlook.
• The U.S. labor market had a strong first quarter, with robust employment growth reported in March coupled with hiring in January and February coming in stronger than initially reported. According to the Labor Department, domestic employers added approximately 431,000 jobs in March, and the unemployment rate ticked down to 3.6% from 3.8% a month earlier. The labor-force participation rate also rose to 62.4%, a positive sign for a historically tight labor market.3
Returns shown in the chart above are for first quarter 2022.
Source: Morningstar®, data as of March 31, 2022. See disclosure page for more information.
• Global stocks broadly declined in the first quarter. Among stock segments, U.S. large-cap value stocks were the most resilient during the quarter, declining a modest -0.7%.
• In U.S. markets from a style standpoint, value stocks overall held up better than growth stocks through the market turmoil. A rising interest rate environment is generally thought to have a greater negative impact on growth stocks because these stocks have cash flows further out into the future that are being discounted at a higher interest rate. Large-cap value stocks declined just -0.7%, whereas large-cap growth stocks declined -9.0%. Small-cap value stocks, which were down -2.4%, also outperformed small-cap growth stocks, which were down -12.6%, by a wide margin during the quarter.
• Developed international and emerging markets stocks lagged U.S. markets during the quarter. A strengthening U.S. dollar relative to international currencies detracted from returns for U.S. investors in international markets.
• Developed international and emerging markets stocks were noticeably outperforming U.S. markets to start the year up until Russia’s invasion of Ukraine. Since the invasion, developed international and emerging markets have trailed U.S. markets, likely in part due to some of these markets having closer economic ties with Russia.
World asset classes
Returns for the first quarter 2022:
Source: Morningstar®, data as of March 31, 2022. See disclosure for more information.
• Yields spiked across the entire curve in the first quarter, driving bond prices lower. The U.S. treasury yield curve flattened during the quarter. Two-year treasury yields rose 1.55% over the course of the quarter, while 10-year treasury yields increased 0.8%.4 Although the immediate effect of the increase in yields is negative price performance for bonds, over time higher yields should benefit long-term bond investors as reinvestment takes place in bonds with higher yields.
• Investment-grade and below investment-grade fixed income sectors experienced negative performance in the first quarter. Municipal investment-grade bonds, down -4.8%, outperformed taxable investment-grade bonds, down -5.9%, this quarter.
• U.S. high-yield credit spreads widened during the fourth quarter, but high-yield bonds still outperformed investment-grade bonds.5 High-yield bonds returned -4.6% during the quarter. Emerging markets bonds were the laggards during the quarter, declining -10.0%. Within the bond market, the geopolitical risk of the Russian invasion appeared to have the greatest impact on emerging markets bonds.
Especially during uncertain times, focus on what you can control, maintain discipline and invest in a well-diversified portfolio suited to your unique financial goals, objectives and risk tolerance. We firmly believe that these are the keys to a successful long-term investing experience.
If you need assistance putting together a diversified portfolio or navigating the current market volatility, contact Wipfli Financial.
An update on markets and the Russia-Ukraine conflict
Markets: The good, the bad and the ugly
What a year: Taking a moment to reflect on market performance in 2021
[Video] Demystifying sustainable investing
U.S. Stock Market: Russell 3000 Index
International Developed Stocks: MSCI EAFE NR Index
Emerging markets stocks: MSCI EM NR Index
U.S. bond market: Bloomberg Barclays Aggregate Index
Emerging markets bonds: JPM EMBI Global Diversified TR Index
Large-cap value U.S. stocks: Russell 1000 Value Index
Large-cap growth U.S. stocks: Russell 1000 Growth Index
Small-cap value U.S. stocks: Russell 2000 Value Index
Small-cap growth U.S. stocks: Russell 2000 Growth Index
Int-term municipal bonds: BBgBarc Municipal 1-10Y Blend 1-12Y Index
High-yield U.S. bonds: ICE BofA BB-B US CP HY Constrained Index
Return data represent past performance and are not indicative of future results. Historical returns of indices do not reflect applicable transaction, management or other applicable fees, the incurrence of which would decrease historical performance results. Index information has been compiled by Wipfli Financial from sources Wipfli Financial deems reliable, but has not been independently verified. Historical performance results for investment indices and/or categories have been provided for general comparison purposes only. Indices are unmanaged. It is not possible to invest directly into an index. Any charts and graphs represented herein are for informational purposes only and cannot in and of themselves be used to determine which securities to purchase or sell, or when to purchase or sell securities.
Source: ©  Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results