Market highlights, Q122
• Despite mixed first-quarter results, markets partially bounced back in March.
• Medical risks related to Covid-19 fell substantially throughout the quarter.
• The Russian invasion of Ukraine and the Fed’s monetary tightening policies impacted markets.
Positive March wraps shaky quarter
Equity markets partially bounced back in March. The S&P500, Dow Jones Industrial Average (DJIA), and Nasdaq Composite gained 3.71 percent, 2.49 percent, and 3.48percent, respectively. For the quarter, the S&P 500, DJIA, and Nasdaq Composite lost 4.60 percent, 4.10 percent, and 8.95percent, respectively. Per Bloomberg Intelligence, as of March 25, 2022, with 99 percent of companies having reported actual earnings, the average earnings growth rate for the S&P 500 in the fourth quarter was 28.9 percent (above analyst estimates).The S&P 500 finished the month above its 200-day moving average; however, the Nasdaq Composite and DJIA both finished the month below trend. The S&P 500 fell below its trendline in February before recovering in March. The MSCI EAFE Index gained 0.64 percent in March but declined 5.91 percent for the quarter. The MSCI Emerging Markets Index fell 2.22 percent, with a loss of 6.92 percent for the quarter. The MSCI EAFE and MSCI Emerging Markets indices ended the quarter below their respective 200-daymoving averages. The 10-year U.S. Treasury yield started at 1.63 percent, then increased to 1.72 percent and 2.32 percent. Short-term interest rates experienced upward pressure throughout the quarter. The Bloomberg U.S. Aggregate Bond Index dropped 2.78 percent for the month and 5.93 percent for the quarter. For high-yield fixed income, the Bloomberg U.S. Aggregate Corporate High Yield Bond Index down 1.15 percent in March and 4.84 percent for the quarter. High-yield credit spreads started at3.05 percent, reached a high of4.21 percent, then retreated to 3.33 percent at quarter-end.
Risks change during quarter
Risks to economic recovery and markets shifted throughout the quarter. Declining medical risks were offset by aggressive plans from the Fed to tighten monetary policy as well as uncertainty created by the Russian invasion of Ukraine. Medical risks fell during the quarter when the impact from the Omicron variant peaked in mid-January before swiftly declining by quarter-end. Other risks negatively impacted markets during the month and quarter. Inflation remains high, driven by demand and supply chain shortages. The Fed also hiked interest rates at their March meeting (the first since 2018). Geopolitical risks increased during the quarter, mostly related to Europe following the Russian invasion of Ukraine.
Economic momentum continues
Despite shifting quarterly risks, March’s data releases showed continued economic growth. The March job report showed 431,000 new jobs during the month, contributing to more than 1.68 million new jobs during the quarter and driving the unemployment rate to a 2-year low of 3.6 percent. Consumer spending increased in January and February.
Retail sales growth was especially impressive as sales increased 4.9 percent in January and another 0.3 percent in February. Business confidence and spending did well despite rising risks. Manufacturing and service sector confidence remained in healthy expansionary territory throughout the quarter, including a 1.2 percent manufacturing production increase. New home construction was impressive with high levels of housing demand and a shortage of existing homes for sale. As shown in Figure 1, the pace of new home construction hit its highest level since 2006 in February.
Continued growth expected
The first quarter served as a reminder that real risks remain despite medical and economic progress. The expectation for tighter monetary policy will likely continue to weigh on markets, and uncertainty from the Russian invasion of Ukraine could lead to further market selloffs. March reports showed the economy remains on solid footing despite shifting risks. We remain in a healthy place, with impressive labor market recovery over the past two years. While negative headlines and shifting risks may lead to further short-term turbulence, strong fundamentals and continued economic recovery should help long term. A well-diversified portfolio matching investor goals remains the best path forward for most. If concerns remain, reach out to your financial advisor to discuss your financial plans.
Information according to Bloomberg, unless stated otherwise.
Please see last page for important disclosures.
Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of
30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market
capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg
government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.
Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7th Ave. Suite #304, North Saint Paul, MN 55109. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 651-774-8759 or at firstname.lastname@example.org.
Authored by the Investment Research team at Commonwealth Financial Network.
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