Global financial markets experienced widespread losses during the first quarter of 2022, as well as increased volatility. The rise in market volatility can be attributed to the uncertainties surrounding the Russian invasion of Ukraine, the outlook for energy prices, persistent inflation, and anticipation of changes to monetary policy with the Federal Reserve signaling increases to interest rates.
All major market indices were negative during the quarter. Equity markets, as measured by the S&P 500 Index, fell by 4.6%.
By market capitalization, large cap stocks continued to outperform small and mid-cap stocks as they are typically better prepared to weather price and interest rate increases. By investment style, value stocks outperformed their growth counterparts with several of the value sectors, such as energy, financials and health care, outperforming the overall market.
At the sector level, energy was by far the best performing S&P sector up 39% for the quarter and 64% for the trailing 12-month period ending March 31, 2022.
Foreign markets fell 5.4% during the quarter, as measured by the MSCI All Country World ex US Index, and emerging markets lost even more declining almost 7%.
Interest rates increased significantly during the quarter with the 10-year Treasury yield starting the quarter at 1.52% and finishing at 2.32%, causing the bond markets to decline sharply. U.S. corporate bonds fell 7.7% during the quarter while U.S. Treasury bonds fell by 5.6%.
The US economy slowed during the first quarter. Growth continued to be hindered by supply-chain disruptions, labor shortages and new lockdowns in China. While first quarter Gross Domestic Product (GDP) contracted at an annual rate of 1.4% due to declining inventories and net exports, consumer spending and business investment remained strong.
Jobs continued to be added to the economy with notable gains in leisure and hospitality, professional and business services, retail, and manufacturing. Employment figures have almost reached pre-COVID levels with the unemployment rate at 3.6% and approximately 6 million unemployed people.
Inflation, as measured by the Consumer Price Index (CPI-U), grew at a pace of 8.5% for the past 12 month period ending March 31, 2022. Increases in the indexes for gasoline, shelter, and food were the largest contributors to the headline inflation figures. The energy index has risen 32% over the past 12 months and the food index has increased almost 9%, so consumers are being hit by higher prices in most aspects of their daily lives.