Equity Overview

Stocks are off to a bumpy start to 2022. Entering the second quarter, the impact of Covid-19 on the global economy is beginning to subside. Entering the second quarter, investors face significant new challenges including Russia’s invasion of Ukraine, soaring inflation and a Federal Reserve that finally appears ready to start tightening monetary policy. In the early months of 2022, the stock market experienced a sharp correction falling nearly 15% by early March. By late March, however, stocks had recovered much of their losses finishing the quarter down only 5%.

The financial market implications of Russia’s invasion of Ukraine have been relatively contained so far, however, the longer the conflict lasts and the further it escalates, the potential for more widespread shock is heightened. In the U.S., the biggest impact we have felt is higher energy prices. While higher energy prices hit the consumer’s wallet at the gas pump, energy consumption in the U.S. has been declining for years, so far muting the overall impact to the economy.

Inflation has been more persistent than many originally anticipated. This has been amplified in 2022 due to the conflict in Ukraine and China’s ongoing Covid shut downs, extending ongoing supply chain issues. It is expected that by the end of 2022 we have some relief on inflation, but the longer high inflation persists, the stickier it gets. It should be expected that core inflation remains well above 3% through 2023. This inflation, combined with a very strong labor market, has forced the Fed’s hand to move quickly on interest rate hikes. In March, the Federal Reserve increased the fed funds rates by .25% and signaled potentially six more rate hikes in 2022.

Despite the issues the world has experienced over the last two years, the stock market continues to be resilient. After being down nearly 15% in the early parts of March, the S&P 500 sits around 4,580, or about 5% below all-time highs. This is after experiencing gains of 31%, 18% and 28% in 2019, 2020 and 2021. To say we were due for a pullback is an understatement. LPL Financial recently lowered their S&P 500 target from 5,100 to 4,900 due to the combination of higher interest rates and the potential for further escalation in Ukraine. Despite this change, our investment committee continues to favor stocks over bonds and cash. Based on the uncertainty overseas, LPL has downgraded international and emerging markets equities and continues to favor U.S. stocks.

Fixed Income Overview

The current inflation and interest rate picture caused a sharp spike in bond yields in the first quarter of 2022, resulting in negative returns across most bond sectors. The persistence of inflation suggests the Federal Reserve will be tightening for the foreseeable future, further pressuring bonds over the next 12-18 months. The 10-year treasury was near 2.5% at the end of March, up nearly 1% from the start of the year. Although rising interest rates cause pain for bond investors, higher bond yields would be welcomed from a longer-term investment perspective. As the economic cycle matures, bonds can still play a role for investors looking for diversification. Much like the equity side of the portfolio, expectations should be moderated as bonds outperformed for many years with low and falling interest rates.

Please do not hesitate to reach out with any questions or comments you have!