US Market Update
Well, that was not the start we were hoping for after a strong 2021. After closing at an all-time high on the first trading day of the year, we saw nearly uninterrupted selling across all sections of the US market. Unpleasant? Yes. Unexpected? No. As we mentioned in prior communications, we are in a midterm election year that tends to see more volatility than other years in the presidential cycle. Compounding that fact were rising inflation figures and an unexpected act of aggression by Russia. Whatever the cause of the volatility, know that it is a normal function of markets. We would all like our money to increase indefinitely with no stress, but these periods remind us what the price of admission is for long-term gains. While all domestic stock indices pulled back, the tech-heavy Nasdaq-100 saw the worst of it. Rising interest rates caused many investors to quickly reprice the shares of high-growth technology stocks, which was evident in the index’s 9.08% decline. The S&P 500 was the leader of the bunch, declining only by 4.95% as a mid-March rally pulled it out of double-digit decline territory.
International Market Update
Being the epicenter of geopolitical conflict certainly did not help the returns of European stocks this quarter. The MSCI EAFE index above is comprised of over 60% European and United Kingdom stocks (Russia and Ukraine are not part of this index). What might be surprising is the size of the decline, all things considered. Despite most of its constituents having the threat of nuclear war at their doorstep, the MSCI EAFE saw a modest 6.61% decline. Slightly worse, emerging markets saw a decrease of 7.32% for the quarter. China’s weakness continues to dominate that story as it comprises 30% of that index. Under the surface, there are some pockets of strength, notably in Brazil. Benefitting from increased commodity prices, the Brazilian stock market grew 34% in Q1. Mexico was another emerging economy that saw positive returns in Q1, at a respectable 8.3%.
Fixed Income Update
Bonds came under pressure as rising inflation caused investors to sell their bonds in the first quarter. Why is that? An investor holding bonds gets paid a consistent amount until the bond matures. If the purchasing power of those coupon payments decreases as inflation rises, bonds become a less-desirable investment. Also, shorter-term bonds must adjust for higher rates set by the Federal Reserve. The silver lining for fixed income investors is that as interest rates become elevated, investments in the asset class are now more attractive than they were last year. One thing to keep an eye on as we move forward: an inversion of the yield curve. For those who don’t remember from 2019, a yield curve inversion happens when a short-term Treasury bond yields higher than a longer-term Treasury bond. This gets a lot of press because an inversion of the yield curve has preceded every one of the last eight recessions. We will have a more detailed post about this in the future.
In Case You Missed It
We wrote a couple of blogs that we think you might like:
Where do we go from here?? As with most things – it depends. Will we get a bit of a handle on inflation? Will the Fed continue its current path of rate hikes or will it alter its strategy? Will the horrendous war in Ukraine come to a resolution? Will the political climate get nasty in the coming months? (That’s a "probably"). How these and many other issues that affect markets play out will set the course for a few things in the economic world.
The one thing we do know is that the continual monitoring of your portfolio and decisions about what moves, if any, need to be made will be at the forefront of our efforts here at Continuum. We are always here to provide whatever guidance we can in order for you to keep your goals and needs on track. Always feel free to reach out with questions or concerns. Take care and stay well !!
Authors: Tim Smith, AAMS & David Rath, CMT, CFA
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