Kevin E. Donovan, CFA, and Parker G. Trasborg, CFP(R) discuss recent major headlines and what happened in markets during the first quarter of 2022.

Kevin E. Donovan, CFA
Kevin E. Donovan, CFAPortfolio Research Director
Parker G. Trasborg, CFP®
Parker G. Trasborg, CFP®Senior Financial Adviser

Parker:

Hi, I’m Parker Trasborg, Senior Financial Adviser at CJM Wealth Advisers. Joining me today is Kevin Donovan, our Portfolio Research Director to give us an April 2022 market update. Now, Kevin, we saw that 2021 was a great year for markets with the S&P up over 26% for the year. 2022 brought with it heightened concerns about inflation, the start of the war in Ukraine, rising bond yields, and a yield curve inversion across various bond durations. So how did all of that negative news impact the markets?

Kevin:

Yeah, it seemed like there was just negative news upon negative news in the first quarter. And some of it was expected and some of it wasn’t. So let’s take a look at the charts and see how the markets reacted. So this is the year to date look on the major indexes and you can see for the stock indexes, the US indexes, the S&P 500 and the Dow were down about four and a half to 5%. Let’s call it 5%. International index was a little worse, down about six and a half percent. And bonds were down about 6%. So everything was negative, not a great quarter. It’s not something that we’re going to remember fondly looking back on it. And pretty much right from the start, you can see in the beginning of the chart markets were down in January.

Now that was a lead up to the Fed talking about they were going to start increasing interest rates and inflation numbers were coming up at the highest levels they’ve been in 40 years. The markets recovered a little bit off of that, but then Russia invaded Ukraine in late February and you can see that the markets really decline there, the stock markets. Now, the bonds, the green line actually did pretty well. So there was a flight to safety where people dump stocks and buy bonds, and that increases the bond prices. And you can see the markets flattened out in early March. Now this is what typically happens when you have a crisis like this, right? Everyone sells off in the beginning. Then they reassess what the real risks are to the economy. And it turns out the Russian economy is very, very small compared to the US.

There’s not a lot of interaction there. So when people start to realize that, they start to buy back stocks and stocks had a rally going into the end of the quarter. At the worst, the S&P was down 12%. The international index was down 15% and we only ended the quarter in the mid single digits. So all in all with all the bad news that was out there, it wasn’t that bad of a quarter. It’s never good to see a negative return, but pretty much where we are at the end of the quarter was where we were at the start of December. So the entire first quarter wiped out the gains that we had in December of last year. So the last few months were pretty much a wash.

Parker:

Okay. Yep. So lots of negative headlines out there, and the markets responded with heavy volatility. Is there anything positive that we can really grasp on to looking ahead?

Kevin:

Yeah. There are a few things. We all know that inflation is dominating the economic news right now, but behind that inflation, we have a pretty strong economy. We’re still recovering from COVID. We have fits and starts, depending upon waves of the virus, but the economy is strong. Employment is very low. We talk about a 40 year high in the inflation rate. We’re looking at a 50 year low in unemployment. So a lot of people have jobs, wages are rising and that’s a good thing. It does feed into inflation though.

So in economics, we talked about it at our Wednesday morning meetings every week, Parker, there are good things, there are bad things. Good things cause bad things. It’s very, very complex. Another good thing is that earnings, corporate earnings have been very strong. Now in the first quarter this year, that earnings growth rate is expected to be lower than the previous quarter, but still positive earnings growth. And then as we go through the year, we’re expecting earnings growth to pick up again, closer to double digit rates. So there are many good things going on in the economy, but it’s hidden by inflation, Fed raising interest rates and some of the negative impacts that it has.

Parker:

Yep. So at least it’s not all negative. We’ve got some positive news, underlying everything in the background and continuing to drive the economy. What are your thoughts around the market for the rest of the year?

Kevin:

Well, going forward, the Fed is going to increase rates a lot more than we had expected last year at this time say, or even six months ago. There may be some 50 basis point increases in the federal funds rate. And that’s going to put pressure on bond yields to rise. When bond yields rise, bond prices fall. There is one more chart I’d like to show about bond yields. And if we pull that up, this is going back over the past year and it shows just how dramatic the spike in interest rates or bond yields has been in the past few months.

You can see, just so it’s highlighted here since beginning of March, when I talked about the flight to safety, when that unwound and people started selling bonds again, that coincided with the first rate hike by the Fed. And that really sent bond yields spiking higher. And this is when you see losses in bond funds. Now we took steps prior to this, to mitigate that impact on client portfolios, by going to shifting some exposure to shorter duration bond funds and bond alternative funds that are less sensitive to interest rates. But going forward, that’s going to be a pressure on the economy going forward. Higher yields tend to act as a break on the economy and the Fed’s going to do it to fight inflation. It also fights inflation like that for the year ahead.

Parker:

Yeah. Well, thank you so much, Kevin. That’s all the time we have for today. And thanks for the reminder that we need to keep a long term perspective on both the markets and our overall planning goals. So that’s all for today. Thank you all for tuning in and we will see you next time.