Q1 Market Commentary April 12, 2022
2022 has started out mostly negative for both the global stock and bond markets, as the economy responds to increasing prices and the conflict in Ukraine. Rising prices started well before the Russia/Ukraine conflict as strong demand for products was met with a simultaneous shortage of supply for almost everything. A simple economic concept illustrates that when quantity demand outpaces quantity supply, prices go up. The Federal Reserve has been talking about “transitory” inflation for some time, and now have finally acted to slow inflation down by raising interest rates a ¼ of a percent. Policies from the new administration that are unfavorable to the oil and gas industries influenced the rising price of oil, which was then exasperated by national responses to the conflict. Increasing oil and gas prices make it more expensive to produce and deliver goods, adding on to inflationary pressures.
Not all past military conflicts have had the same effects on global markets. Normally, there is a short-term negative reaction to stocks. How steep the decline or how long the duration will last is difficult to predict, so investors who exit stocks might very well miss out on the potentially quick upswing. Also during times of uncertainty, there can be wild swings in the market intra day. For instance, the NASDAQ Composite had a 5% swing in one day, from a -2.5% in the morning to end up positive 2.5% by the afternoon. The market had also been in bear market territory on March 14th (a drop of 22%), but rallied to end the quarter -8.9%. When markets are swinging widely, the best strategy is to keep a long-term perspective and stick to the diversified portfolio strategy that is most likely to help you achieve your goals.
For the quarter, large U.S. companies represented by the S&P 500 Index lost 4.6%. Small companies represented by the Russell 2000 lost 7.5% for the quarter. International stocks represented by the iShares MSCI EAFE Index lost 5.9% for the quarter. The bond markets reacted negatively to the interest rate increase and The Barclays US Gov/Credit 1-5 Year Index was down 3.5% for the quarter.
New reports suggest that unemployment is below 4%. Vanguard’s Chief Economist, Joe Davis, indicated in a recent webinar that there are two jobs available in the U.S. for every unemployed person. This is good news for the economy… as long as the cost of employment does not become too burdensome for employers.
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