Anyone who’s kept an eye on the news during 2022’s first quarter most likely has a good idea of the events contributing to the overall volatility of the market during that time.  

These events include the Federal Reserve’s increased interest rate– the first since December 2018– in addition to Russia’s invasion of Ukraine. Russia is a significant global supplier of crude oil, wheat, metals, and more. Plus, Eastern Europe contributes revenue to many United States companies, so a slowing economy in Eastern Europe means company losses in the U.S., which in turn drives down stock prices. 

The current war in Eastern Europe is far from the only contributing factor to the volatile outcome of Q1 2022. Another major factor is the Federal Reserve’s interest rate increase– the Fed’s first since December 2018. 

High inflationary pressure is also ongoing as a result of increases in supply costs and continued supply chain delays. 

At the end of Q1, the S&P 500’s 4.6% decline is slightly misleading– although it’s the S&P’s first negative quarterly return since Q1 2013, its performance varied wildly throughout the quarter. At one point in late February and early March, the S&P was down 12.5%.  

Portfolio manager Glen Kashetsky, a Partner with Oxford Harriman & Company in New York City, notes “These events sent the markets and investors on a roller coaster ride during Q1.” 

The MSCI EAFE index’s first quarter ended with a -6.5% return; the MSCI Emerging Market Index produced a -7.6% return. Part of the reason for these negative returns was the strength of the U.S. dollar, which negatively impacted international stocks via translation losses. 

Various economic sectors vastly differed in performance during Q1, with energy taking the lead. The energy sector returned 39%, as a result of oil prices soaring up to 30%. “On the other hand,” says Mikal Haddad, “Communication Services, Consumer Discretionary, and Technology were the three worst-performing sectors due to their large allocations to growth stocks, which experienced a sharp negative decline during the first quarter.” 

Typically, an increase in the federal interest rate has a serious impact on long-term investments like growth stocks. Longer maturity bond prices can drastically decrease as a result of increased interest rates, while shorter-term investments remain relatively unaffected. 

Mikal Haddad, Partner and Managing Director of Oxford Harriman & Company, says “The pace and sharpness of the increase in Treasury yields caused bonds to underperform equities during the first quarter. In fact, bonds had their worst quarter in 20 years. Corporate investment grade bonds produced a total negative return of 8.4% for the quarter. High-yield bonds likewise experienced negative returns for the quarter, declining by 4.7%.” 

Shorter-term bonds were not affected quite as much, with a decline of 3.62%. According to Kashetsky, this indicates that investors are concerned about interest risk, as opposed to credit risk. 

So far, 2022 has continued 2021’s trend of rapidly increasing inflation rates. In fact, during February, inflation rates increased at their fastest pace since January 1982. These inflation rates directly impact many aspects of consumer life by significantly increasing the costs of living. Since January 2021, the costs of food, vehicles (not to mention fuel!) and rent have all increased.  

During the height of the COVID-19 pandemic, consumers were saving a lot more money as a result of spending less on food, services, and travel, combined with unemployment insurance and federal stimulus payments. However, those savings have largely trickled away due to increasing costs of living. A decrease in consumer spending has the potential to greatly affect the U.S. economy, but Glen Kashetsky says “As of right now, there doesn’t appear to be a threat of a dramatic slowdown.” 

As we head into Q2, there are plenty of expectations and projections for the United States economy, but the volatility of the past few years is an indication that virtually anything is possible. Inflation pressures are expected to ease throughout the rest of 2022, but as energy prices continue to rise, the ease in pressures will remain to be seen. 

The rest of 2022 also remains potentially volatile, as a result of geopolitical issues in Eastern Europe and U.S. midterm elections, among many other factors.  

Haddad’s opinion: “We recommend tuning out the political noise. Markets historically have been driven by corporate earnings and the underlying strength of the U.S. economy. We see no reason why this time is any different.”  

Keeping an eye on the markets and avoiding excessively risky financial decisions will put investors in a good position to mitigate whatever the rest of 2022 has in store for the United States economy. 

If you’d like to discuss the markets or your investment portfolio with the experts at Oxford Harriman & Company, you can reach out or call the location closest to you. 

Cleveland | Detroit | Mentor | New York City | New Jersey | Sarasota | Saratoga County 

Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request. Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Oxford Harriman & Company is a separate entity from WFAFN.