Q1 2022: Tug of War

An unusually strong tug of war between economic forces is playing out in global markets, with a booming economy and low unemployment offset by the effects of the Russian invasion of Ukraine and expanded inflation. Expectations over the timing and magnitude of Fed interest rate increases rapidly evolved as clarity began to emerge around central bank responses to inflation. Markets took these events as a potential start of a new investment regime, which resulted in a bad quarter for global stock markets and a terrible quarter for bonds.

Market Performance

Following a surprisingly good 2021, the first quarter of 2022 faced challenges on multiple fronts. 2-year U.S. Treasury yield, most sensitive to interest rate policy, rose to 2.3% by 160 bps during the quarter, resulting in a partially inverted yield curve.

Two key factors that have greatly contributed to market volatility: unknowns around how high rates need to be raised to tame inflation without causing a recession, and uncertainty about how many rate hikes will actually be realized. Against the backdrop of uncertain rates, U.S. bond markets experienced the worst quarter since 1980 with a loss of 6%, while global equities went down 5.4%. Large-cap stocks outperformed small-cap by more than 2%, and U.S. markets continued to lead international markets, though to a lesser extent, with S&P 500 down 4.6%. Value outpaced growth in Q1, supported by energy and less rate-sensitive sectors.