Q1 2022 Market Perspective: Inflation, Value, Invasions and Returns

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Texas decided to skip spring, and transition directly into summer. The markets also felt the heat throughout the first quarter of 2022, and it was challenging to say the least. After an extended period of mostly upward trajectory returns, it was a stark reminder that discipline is the glue that binds your financial plan and portfolio together. It was also a reminder that it’s impossible to predict markets. If you went to Vegas and had to place a bet… would international equities beat U.S. equities if Russia invaded Ukraine? Who would’ve wagered against the U.S.? Well, international markets did outperform the U.S. in Q1. Even more surprising, equity markets improved after the Russian invasion. Once again, the house would have won the wager, and it’s not an anomaly considering history (more on this below…).

Our firm belief is that making systematic data driven assessments each quarter maintains balance and avoids harmful biases. This is why we position your portfolio to be the ‘house’ and not the guy playing craps after a few martinis. Read on for more thoughts on core issues and themes for 2022.

• Markets pulled back in the first quarter of 2022 with technology stocks dipping into bear market territory (decline of 20% or more) while diversified value-oriented investors experienced a smoother ride. International beat the U.S. as well.
  • International Stocks (MSCI ex US Index): -5.18% Q1
  • U.S. Stocks (Russell 3000): -5.28% Q1
  • U.S. Bonds (Bloomberg Barclays Aggregate Index): -5.93%Q1
  • Emerging Market Stocks (MSCI Emerging Index): -6.65% Q1
  • U.S. Small Cap (Russell 2000): -7.53% Q1
• Russia invaded Ukraine on February 24, and unfortunately, the conflict is expected to drag on, albeit with low risk of spillover into other countries. For impact on the markets, consider S&P 500® performance in the 12 months following geopolitical conflicts of varying magnitude:
  • 2/20/2014 Russian annexed Crimea: +17.1%
  • 3/20/2003 Iraq War: +29.2%
  • 9/11/2001 September 11th: -15.5%
  • 8/2/1990 Iraq invades Kuwait: +12.8%
  • 12/24/1979 Soviets invade Afghanistan: +39.6%
  • 10/16/1962 Cuban Missile Crisis: +26.4%
  • 6/25/1950 North Korea invades South Korea: +12.6%
  • 12/7/1941 Pearl Harbor: +0.2%
  • 3/1/1939 Germany invades Poland: -4.3%
• Core inflation peaked at 6.5% in March, higher than the 5.5% reading in 2021. This is simply a function of supply and demand since COVID. Households received government checks, high earners (and big spenders!) remained employed as companies went remote, and consumer spending shifted (and increased) to durable goods vs. services. A supply-side, event-driven recession meant that the global economy couldn’t easily meet that demand, and production has attempted to catch up ever since. Fortunately, multiple efforts are in the works to stymie inflation. The Fed has acted swiftly by raising rates, and six more rate hikes are expected. Supply chains are also loosening up, prioritizing production closer to home since 2020. Stimulus checks have ceased, diminishing the extra cash sloshing around the economy and sending labor back into the workforce. These are all meaningful tools to beat back rising prices. Note that core inflation does not include food and energy, two data points prone to short term shocks and swings.
• Since 1926, the data reveals that in periods of high inflation, value companies perform better than their growth counterparts. Q1 was no different. Value beat growth in Q1 by a notable margin, ending the quarter +8.41%. At one point through March 18th, value stocks were up +1.1%, while growth stocks were down -20.44%.

We're big fans of vinyl records, so we’ll conjure up our broken-record firm mantra – never make changes to your portfolio based on news headlines, only your personal headlines! Your portfolio has always been positioned with the expectation that market volatility and inflation will occur. Staying disciplined isn’t easy, but history says it’s worth it.

Sources: Q1 2022 Index Returns dimensional.com, blackrock.com The Resilience of Markets Through Dark Times 3-9-2022, First Trust Value vs. Growth 3-18-2022, Fred.com, BLS.gov

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.

Index Disclosures:

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.

Index Definitions:

Barclays U.S. Aggregate Bond Index: The Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged index of fixed rate debt securities rated investment grade or higher by Moody’s, Standard & Poor’s, or Fitch rating services. All issues in the index have at least one year to maturity and an outstanding par value of at least $25 million to $1 billion based on the type of security. Indices are not available for direct investment and do not reflect any fees that may be charged.

S&P 500®: The S&P 500® index is an unmanaged index of 500 companies used as a representative sample of the United States economy. The S&P 500® index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

MSCI Ex-US: The MSCI Ex-US index is an unmanaged index used as a representative sample of the global developed economy outside of the United States. The MSCI Ex-US index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charge.

MSCI Emerging Markets: The MSCI Emerging Market index is an unmanaged index used as a representative sample of the global emerging market economy outside of the United States. The MSCI Emerging Market index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charge.

The Russell 2000 index is an unmanaged index of the 2000 smallest companies in the Russell 3000 index. The Russell 2000 Index is used as a representative sample of the small companies in United States economy. The Russell 2000 index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

The Russell 3000 index is an unmanaged index of 3000 companies in the United States. The Russell 3000 Index is used as a representative sample of the United States economy. The Russell 3000 index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

[1] Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.

[2] Investments in emerging markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.