2022 | 1st Quarter
World events and discouraging domestic economic developments led to market volatility and negative returns for most asset classes in the first quarter of 2022. Despite a late March “relief rally’, the S&P 500 produced a negative 4.6% total return. Stubbornly high inflation caused the Federal Reserve to move towards a much tighter monetary policy than previously forecasted, causing investors to re-evaluate exposure to both equities and bonds. In addition, the Russian invasion of Ukraine introduced more uncertainty to the global economic picture as questions regarding supply chains, energy supplies, and the potential spread of the conflict weighed on the markets. Other news overshadowed Covid for the most part but continued outbreaks in China and other countries threatened further disruptions in the global economy. Throughout the quarter, markets had large swings based on the news of the day and we suspect this may continue for the foreseeable future.
Investors gravitated towards large cap and value-oriented stocks during the quarter as higher interest rates pressured valuations on stocks with higher price-earnings multiples and growth characteristics. Apart from energy, which benefited from continuing increases in oil prices, and utilities, all economic sectors of the market were down for the quarter. Consumer discretionary, Technology, and Communications sectors all lagged the overall market by large margins. Despite still having negative returns, Financials, Healthcare, and Industrial stocks performed relatively well versus the S&P 500.
The overall theme of the quarter was investors re-evaluating the risk of higher inflation, interest rate increases, and the war in Ukraine and the effects on various market segments and industries. The generally higher risk profile of small cap stocks and emerging market stocks caused these markets to underperform. U.S. small cap stocks were off 7.5% and emerging markets declined by 7%. Developed international equities performed relatively better but still declined by almost 6%. Portfolios with exposure to these areas generally underperformed the large cap U.S. benchmarks.
Commodities prices rose across the board as inflationary pressures due to continued strong demand from everything from oil and food products to computer chips pushed up prices and strained supply lines still recovering from Covid disruptions. Broad based commodities indexes were up over 33%. The situation in Ukraine has the potential to further strain supplies of important grain, wheat, and fertilizer products. Real estate, which has been a strong performer over the past few years showed signs of slowing down due to the increase in mortgage rates.
Bond performance for the quarter was the worst in nearly forty years as inflation surged and yields rose to their highest levels since before the Covid pandemic. All fixed income sectors fell during the quarter as the Fed signaled that it would be much more aggressive in raising interest rates than had been thought just last quarter. Corporate debt was the worst performing bond class for the quarter as it was affected not just by higher rates but also the higher probably that the economy will slow this year. Treasury inflation protected securities (TIPS) were the best performing sector.
Looking ahead, we expect that markets will continue to be volatile in the short run. While geopolitical events like Ukraine tend not to have long lasting effects on markets, changes in the macroeconomic environment due to inflation and rising interest rates can. The Fed faces a delicate task in raising rates and decreasing its holdings of bonds purchased during the Covid pandemic in order to combat inflation while not tipping the economy into recession. We still believe that quality equity holdings remain more attractive than bonds and have maintained our allocations. Corporate earnings continue to grow, albeit at a slower pace, and end demand and employment remain strong, so a meaningful recession is unlikely this year. With the Fed indicating that it is likely to increase rates to 1.5%-2% this year we still are keeping the fixed income portion of our portfolios in relatively short maturities, high quality municipals and adding some exposure to TIPS where appropriate.
We understand that market declines and volatility can be unnerving. However, this is a normal market reaction to a change in the overall direction of the trajectory of interest rates. In some ways it is cleansing in that it shakes out some of the more speculative areas of the market before they become overheated and become a systemic risk. We will continue to evaluate the market dynamics and make changes as needed.
As always, please call with any questions.
Jonathan F. Kolle, CFA Joseph K. Champness Shawn R. Keane, CFP®
President Director Vice-President
Rusty Giles James V. Kelly, CFA
Director of Marketing Director
The foregoing content reflects the opinions of Smithbridge Asset Management and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.
Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will act as they have in the past.