First Quarter 2022 Update

April 30, 2022

Key Points

• After posting gains in each of the past seven, and 11 of the past 12, quarters, stocks faltered as investors became concerned about persistently elevated inflation and geopolitical tensions
• As was widely expected, the Federal Open Market Committee (FOMC) began what is expected to be a long cycle of interest rate increases, raising its federal funds rate target range to 0.25% to 0.50%, from a range of 0% to 0.25%, at its latest meeting in March
• The yield curve is very near inversion, which often presages a recession, and the FOMC will need to walk a fine line to avert such a scenario.

1st QUARTER 2022 MARKET COMMENTARY

Below, we’ve highlighted 2022 broad market returns for the first quarter and year-to-date time periods:

Source: Refinitiv

THE GLOBAL ECONOMY

The US economy generated accelerated growth in the quarter, as pandemic-related restrictions had increasingly been lifted and the Omicron variant emerged too late to have impacted the data. Against this backdrop, the Bureau of Economic Analysis released the third estimate of the fourth quarter 2021 real GDP, a seasonally adjusted annualized increase of 6.9%, slightly lower than the prior estimate, but a meaningful improvement over the 2.3% increase in the prior quarter. The employment situation surprised on the upside in the quarter, as gains were far above expectations. The February report showed that employers added 678,000 jobs in the month, and that the unemployment rate fell to 3.8%. The Federal Open Market Committee (FOMC) began what is expected to be a long cycle of interest rate increases, raising its federal funds rate target range to 0.25% to 0.50%, from a range of 0% to 0.25%. The committee signaled that this increase will be the start of what it referred to as an “ongoing” series of increases. Analysts expect the FOMC to implement an additional five or six rate hikes by year-end as it attempts to cool inflation while not harming the economy.

EQUITIES

After posting gains in each of the past seven, and 11 of the past 12, quarters, stocks faltered as investors became concerned about persistently elevated inflation and geopolitical tensions. In addition, supply chain bottlenecks remained a stubborn problem, and employers continued to have difficulty filling open positions. The S&P 500 peaked on the second trading day of the quarter, declined steadily into the middle of March, and then recovered somewhat into the end of the quarter. Investors grappled with negative inflation news and the Russia-Ukraine war. When the quarter ended, the S&P 500 Index had declined -4.6%.  International stocks also generated extremely poor results during the quarter, and generally did not perform as well as US equities. The MSCI ACWI Ex-USA Index, which measures performance of world markets outside the US, fell by -5.4%. The MSCI EAFE Index of developed markets stocks were lower by -5.9%, while emerging markets stocks were lower, as the MSCI Emerging Markets Index fell by -7.0%.

FIXED INCOME

As was widely expected, the Federal Open Market Committee (FOMC) began what is expected to be a long cycle of interest rate increases, raising its federal funds rate target range to 0.25% to 0.50%, from a range of 0% to 0.25%, at its latest meeting in March.  The committee also signaled that a series of rate hikes is likely appropriate to gradually condition investors to changing monetary conditions. Persistently high inflation that has approached levels not seen in 40 years precipitated the move and fixed income securities’ prices were sharply lower (and yields higher) in the quarter as a result.  In addition, the FOMC raised its inflation estimate for the year to 4.3% from 2.6% in December. The FOMC’s “dot plot,” a forecast of future rate changes, indicates the committee now expects the fed funds rate to be at 1.9% at the end of this year, and 2.8% at the end of 2023.

SUMMARY

The global economy has started to slow after reaching near peak growth in the latter part of 2021 on the backs of historical levels of fiscal stimulus and a strong rebound in China. After a strong on the fourth quarter of 2021, economic activity has begun to slow more than expected early in 2022 due to rapidly accelerating inflation emanating from goods shortages due to supply chain bottlenecks, as well as a continued jump in inflation driven in part by surging commodity prices brought on by the Russia-Ukraine war. Most of the world is in a better place economically than a year ago, but economists warn that results will be uneven throughout 2022, as new variants of the virus may emerge, and the potential for rising interest rates to suppress growth. With rapidly accelerating inflation and central banks raising interest rates, economists are expressing more concern about the potential for stagflation entering the picture, particularly if central banks hike rates either too quickly, or too slowly. The yield curve is very near inversion, which often presages a recession, and the FOMC will need to walk a fine line to avert such a scenario.

Information provided is for informational purposes only and should not be construed as investment advice. The views expressed are current only as of the publication date, are based on information that St. Clair Advisors believes to be accurate, and subject to change without notice. All investment decisions must be evaluated as to whether they are consistent with your investment objectives, risk tolerance and financial situation. St. Clair disclaims any liability for any direct or incidental loss incurred by applying any of the information in this publication. Indexes are unmanaged and one cannot invest directly in an index. Past performance is no guarantee of future results.

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