Q1 in Review
by Zach Marsh on Apr 1, 2022
2022 has gotten off to a rough start. Stocks began to buckle under the prospect of the Fed’s response to runaway inflation even before Russian forces invaded Ukraine. Putin’s decision to invade Ukraine not only exacerbated the prospects for lasting inflation, but also the prospect for a continually destabilized geo-political world. Before the markets staged a comeback the last half of March, the Nasdaq 100 and the Russell 2000 were each down over 20%, while the S&P 500 was down over 10%. The final tally for the quarter for U.S. stocks was modestly better, with the S&P finishing down 4.6%, the Russell 2000 down 7.54%, and the Nasdaq 100 down 8.76%. This past quarter was the first negative quarter for stocks since Q1 2020.
Stocks were not the only asset class to get off to a bad start. Barclay’s Aggregate Bond ETF was down 5.85%, while the 10-year US Treasury bond price declined by over 6%. On the other side of the ledger, DBC, Invesco’s Commodity ETF, was up over 25%, and gold was up over 5%. The massive rally in commodities followed Russia’s invasion of Ukraine. The sanctions placed on Russia caused a substantial rally in oil and oil products, as well as metals such as nickel. Ukraine is a large producer of wheat and the prospect for a production disruption sent wheat prices skyrocketing.
None of these moves in commodities helped dispel the prospect for large increases in interest rates for the coming year. Over the past three months the market’s expectations for Fed rate increases has risen from 5 to 9 hikes. With the Fed desperately in need of playing catch up to bring down inflation it looks increasingly likely that we may see near-term rates move from near zero at the start of the year to somewhere near 2.5-3% by year’s end. With inflation hovering near 8% it seems necessary for the Fed to start moving rates up at a quicker pace than ¼ percent at a time. Moves in the expectation of short-term rates has caused the yield curve to invert. Notably this means that the rate on 2-year notes is higher than the rate on 10-year notes. Yield curve inversion tends to predict future recessions. Prospects for recession are not generally positive for risk assets like stocks.
Unfortunately for anyone trying to time the market, yield curve inversion doesn’t offer much in the way of a good timing mechanism. The last time the curve inverted was August 2019. The S&P 500 continued to climb another 18% afterwards and was only sent lower by the outbreak of Covid. The yield curve also inverted in 2006 and the market continued climbing for another year and a half before finally succumbing to recessionary pressures.
Early parts of rate hiking cycles also do not necessarily portend bad news for the stock market. Rather the market seems to struggle mid-to-late cycle. However, one thing that makes this time a bit more unique is the degree to which the Fed is behind pace. I tend to be in the camp which views this cycle as more fraught with danger because of the projected velocity of rate hikes which will push the whole cycle into fast forward. The next quarter may provide more answers to the questions posed in the first.
Thanks for reading,
Zach and Dave
Disclosures
All opinions are subject to change without notice. Neither the information provided, nor any opinion expressed, constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results. Tax laws are complex and subject to change. Calibrate Wealth LLC, does not provide tax or legal advice respect to the services or activities described herein except as otherwise provided in writing by Calibrate Wealth. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account.
This material does not provide individually tailored investment advice. It has been prepared without
regard to the individual financial circumstances and objectives of persons who receive it. The strategies
and/or investments discussed in this material may not be suitable for all investors. Calibrate Wealth
recommends that investors independently evaluate particular investments and
strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a
particular investment or strategy will depend on an investor’s individual circumstances and objectives.
Investing in commodities entails significant risks. Commodity prices may be affected by a variety of
factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii)
governmental programs and policies, (iii) national and international political and economic events, war
and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities
and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other
disruptions due to various factors, including lack of liquidity, participation of speculators and
government intervention.
Foreign currencies may have significant price movements, even within the same day, and any currency
held in an account may lose value against other currencies. Foreign currency exchanges depend on the
relative values of two different currencies and are therefore subject to the risk of fluctuations caused by
a variety of economic and political factors in each of the two relevant countries, as well as global
pressures. These risks include national debt levels, trade deficits and balance of payments, domestic and
foreign interest rates and inflation, global, regional or national political and economic events, monetary
policies of governments and possible government intervention in the currency markets, or other
markets.