Market Review - Quarter 1, 2022
Source: FactSet financial data and analytics
The war in Ukraine, surging inflation and rising interest rates led markets lower in the first quarter. After a strong 2021, US equities saw its first quarterly loss in two years. During the quarter at its worst, US equities fell 13% and thus into official correction territory (defined as a drop of 10%). While this may be shocking, it remains in line with historical intra-year declines. Since 1980, despite average intra-year drops of 14.0%, annual returns were positive in 32 of 42 years¹. Despite ongoing uncertainty, US equities staged a strong late rebound of nearly 9% to end the quarter at -4.6%.
Source: Zephyr Style Advisor, Standard & Poor’s, FactSet, CNBC, CNN, CBS, MarketWatch, Forbes
Within US equities, nine out of 11 sectors suffered losses in 1Q22. Two sectors with positive returns included Energy and Utilities. Energy sector gained 39% on surging oil prices. Utilities, often considered a defensive sector, also gained 4.8%. Technology related sectors like Communication Services (-11.9%) and Consumer Discretionary (-9.0%) were the worst performers amid fears of rising rates and a slowing economy.
Elevated valuations and rising interest rates hurt long-duration growth stocks. The gap between value and growth stocks across size and style was stark and was significantly in favor of larger and value-oriented segments. Large cap value stocks outperformed large cap growth by 8.3%.
Within international equity markets, both developed and emerging markets fell 5.8% and 6.9% respectively in 1Q22. The conflict in Ukraine weighed heavily on European markets, given its reliance on Russian energy. Additionally, emerging markets, particularly China, struggled as continued COVID-19 lockdowns remained highly disruptive to its economy.
Bonds had their worst quarter in 20 years². US bonds fell 5.9% in 2022 as interest rates rose after the Federal Reserve set out on a more aggressive path to tame inflation. Despite higher inflation, TIPS also fell 3% due to rising rates. Longer-term Treasuries, which have the greatest sensitivity to interest-rate changes, were the hardest hit and fell 10.6%. US high yield bonds fell 4.8% due to the flight to quality stemming from the Russia-Ukraine conflict. Lastly, a stronger dollar and inflation woes also led international bonds lower for the quarter.
Commodities were the biggest winners as the war in Ukraine fueled further inflationary pressures leading to a surge in oil and grain prices. Gold gained 6.6%, living up to its reputation as a safe haven during the market selloff. Expectations for higher interest rates in the US led the dollar to rally 2.6%. After a record 2021, US REITs lost 5.3% over concerns of rising costs due to higher interest rates. However, gains were recorded within subsectors such as hotels and offices, as they continue to benefit from easing economic restrictions.
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