INFLATION, INTEREST RATES, AND WAR, OH MY!
The start to 2022 has been chock full of global news and seen a return of market volatility. Interest rates are on the rise for the first time in what seems like forever, the Russian War with Ukraine began, and oil prices spiked and have sustained around $100/barrel. Not quite the headlines we were hoping to replace COVID-19 or the global shipping crisis. Fortunately, at least in the U.S. for the first time in several years, there were things other than the virus on everyone’s mind – officially passing the two-year mark from when it was declared a pandemic.
At year-end, valuations across most asset classes were elevated. As the weeks chipped away, growth- oriented stocks started to tumble while U.S. value and broad-based international equities held up comparatively well. But, since the start of the War, several of those relationships broke down as investors fled to quality (typically high quality fixed income, cash, blue chip stocks) in times of heightened uncertainty. What started out as a good quarter for international markets ended up finishing the quarter worse off than the broader U.S. equity markets.
Another factor dramatically impacting fixed income holdings throughout the quarter was interest rates. There is typically an inverse relationship between bond prices and interest rates. When interest rates rise, existing bond prices tend to decline. The 2-year Treasury yield climbed from 0.73% at year-end to 2.28% on March 31, and the 10-year Treasury ratcheted up to 2.32% from 1.52%. Bonds subsequently adjusted and traded down almost 6% (as measured by the Bloomberg Aggregate Bond Index). It was not the portfolio support it often is in times of crisis or a sudden flight to quality.
Too often we hyper-focus on the headlines and forget to see the bigger picture. Including the pull-back in the markets in the final trading days of the quarter, how would you guess that U.S. equity markets performed since the War began in late-February? Down? Down significantly? The answer may surprise you. One proxy for the U.S. stock markets (the S&P 500 for large public companies) immediately traded down about 4%, but it ultimately saw positive price recovery of over 3% since the war began!
Our sincerest gratitude and thanks goes out to each and every one doing their part to help us get through these last few years – from doctors, nurses, the broader medical community, military members and their families, teachers of all capacities – we see you, and we appreciate you. While we may not be out of the woods quite yet, more and more places are continuing to find semblances of normalcy alongside the virus.
Read on as we focus on inflation, unemployment, interest rates, and cryptocurrencies.