Global financial markets rang in the new year on the heels of a strong December rally, peaking on January 3rd. Then the volatility which marked much of 2021’s final quarter reasserted itself. By March 8th the S&P 500 index had suffered a 13% correction, its steepest decline since the onset of the COVID pandemic in March 2020. The high-flying NASDAQ Composite index fared worse, dipping into bear market territory with a 20.54% decline as of the March 14th market close. On that same date the Russell 2000 index of small company stocks retreated to a 15-month low, continuing a long slide that began early last summer. International equity markets corrected sharply as well over the same period.
Full first quarter 2022 performance for the major equity market indices follows:
- S&P 500: - 4.95%
- Dow Jones Industrial Average: - 4.57%
- NASDAQ Composite: - 9.10%
- Russell 2000: - 7.80%
- MSCI EAFE: - 6.61%
- MSCI Emerging Markets: - 7.32%
As their stock portfolios were falling, investors found no safe refuge in the bond markets either. Lofty inflation readings began pushing bond prices lower even before the Federal Reserve announced its intention to begin hiking short term interest rates in March. Declining prices pushed US Treasury bond yields sharply higher in the first quarter across all maturities. Corporate and municipal bonds followed suit, and the first quarter of 2022 ended with the Bloomberg Barclays Aggregate Bond Index falling 5.86%.
While interest rates rose across the board, the yield curve flattened as short-term rates moved much more than long-term rates. Economists and market pundits have become worried about the dreaded yield curve inversion, where short-term rates turn higher than longer-term yields. Yield curve inversions have historically preceded recessions by 12-24 months.
The Russian invasion of Ukraine helped push already declining markets lower, but couldn’t keep stocks from staging an impressive rally over the final half of March. Geopolitical conflicts have historically had short-lived impacts on global financial markets, and the current situation in Europe may prove to be no different at the end of the day. The impact of this particular conflict on the global economy is certain to be significant, however, given the importance of the region to energy and food supplies. The situation will also serve to set back the timetable on restoring global supply chains to normal (i.e. pre-COVID) functioning.
The Fed’s monetary policy has been too loose for too long, and it now finds itself in the precarious position of having to tighten money even as the economy has begun to slow down under the dual pressure from high inflation and the aforementioned supply chain challenges. The financial markets’ behavior in the first quarter of 2022 casts doubt on the Fed’s ability to hold off a recession as it fights the inflation monster.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Market data provided by JPMorgan Asset Management and MarketWatch.com.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following developed
country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK.
The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCI EM Index consists of the following emerging market country indices: Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece, Hungary, Poland, Qatar, Russia, South Africa, Turkey, United Arab Emirates, China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.