Market & Economic Commentary: Q1 2022

A Quarter of Heightened Uncertainty

In the first quarter of 2022, the markets encountered more global turmoil and economic uncertainty than at any period for decades.  Already buffeted by Covid-related supply constraints, continued localized Covid lockdowns, and a persistently tight labor market, the world was jolted by a large ground war in Europe that not only destroyed the post-World War II equilibrium, but also further strained world markets for a wide universe of goods and commodities. 

In the face of these epic stresses, markets flinched, but less than one might have expected given the magnitude of the paradigm shift.  U.S. markets, as defined by the S&P 500, finished the quarter down 4.6%.  After having lost 11.3% up until February 23rd, the day before the invasion of Ukraine, the market briefly dipped further and then staged a partial recovery through the end of March.  International and emerging markets also lost ground, with some more commodity-dependent economies more negatively impacted by the surge in prices from oil to wheat to fertilizer.  Fixed Income markets also finished down, with the Bloomberg Barclays Global Aggregate Index off 6% for the quarter in the face of resurgent inflation and rising interest rates.

The Near Term Eludes Accurate Forecasting

While economists offer (often inexact) forecasts that are based on past economic experiences and input relationships, looking ahead in an era with little historical precedent becomes even more imprecise. Entering 2022, markets already faced uncertainty regarding the global economic recovery from Covid.  Although the Omicron surge was abating in the U.S. and economies were opening, residual supply chain dislocations persisted:  Covid shutdowns bumped up against surging consumer demand for merchandise and labor shortages to create pervasive backlogs.  Although many employees were returning to work, the timing of the unprecedented supply chain recovery remained elusive and difficult to forecast.  The shortage of goods fed into rising inflation as demand exceeded supply. Originally expected to be only temporary as the supply and demand imbalance dissipated, inflation expectations became more embedded in the economies and seeped into areas, such as housing costs, which often prolong inflationary pressures.  While rising wages have helped support expectations for strong consumer demand and economic growth, the erosion of purchasing power offsets this optimistic outlook. 

On top of these unprecedented uncertainties, Russia’s invasion of Ukraine at the end of February upended the markets for oil, gas, and numerous agricultural and other commodities.  Although Russia represents only a small portion of the global economy, it plays an outsized role in the supply of fuel to Europe as well as food to Africa and the middle east.  Aside from the fear of conflict with a nuclear-armed nation and the trauma of human suffering, the war has exacerbated inflationary pressures and stymied the tenuous recovery of global supply chains.  Consequently, whatever growth forecasts economists had offered for 2022 and 2023 have been imbued with even more uncertainty.

Rising Interest Rates Add to the Headwinds

Importantly, the inflationary pressures are informing the Federal Reserve as it sets about withdrawing the stimulus measure enacted at the outset of the pandemic. Not only is the central bank planning to raise interest rates, but it will also cease additional measures in the form of bond purchases that keep interest rates low.  This tightening coincides with a likely end of the fiscal stimulus provided by Congress through Covid relief spending.  Moreover, with the demise of President Biden’s Build Back Better plan, the fiscal measures propping up the U.S. economy are also ending.

With these multiple headwinds, investors have been unenthusiastic about the near-term performance of equities while also fleeing from fixed-income securities, as rising interest rates lead to bond price declines (rate and bond price move inversely as rising rates lead investors to require more yield from already issued bonds).  Although bonds normally provide a hedge to stocks, with bond prices increasing when investors flee equities for more safe investments, the dynamic of slowing growth and economic uncertainty, combined with rising rates, had led to an environment where both asset classes lost ground.

Looking ahead, the Fed now must walk a fine line between tightening monetary policy to head off inflation while refraining from excessive tightening that might tip the U.S. economy into a recession. It is a balancing act that is hard to execute in normal economic circumstances and made much harder by the number of unprecedented events that are causing the current economic displacement.  Some fear that the Fed will tighten too far, failing to account for the disruption to growth caused by the war and tipping the US into a near-term recession.  The prospect of stagflation – low economic growth with persistent inflation – is also discussed.  

The Importance of Staying the Course

Despite the multitude of unprecedented hurdles that may plague investments in the short term, we continue to look to long-term growth for our clients.  As we have discussed in the past, market timing is an art that is hard to effect successfully and often results in selling at lows and missing recoveries. As we try to navigate these unique market conditions, we look to other periods of severe uncertainty, such as the Second World War and the rampant inflation of the 1970s.  As the chart below illustrates, Staying the Course through these tumultuous periods ultimately served investors well. 

While we recognize that uncertainty and volatility make it difficult to withstand the periodic market contractions, we also believe that stocks and bonds, over the long-term, remain the best protection against the loss of purchasing power.  A well-diversified portfolio is the engine that will drive portfolio growth.

Factor-Based Diversification as a Tool for Long-Term Growth

By utilizing factor-based investments, augmented with opportunistic stock purchases, we strive to capture long-term market appreciation while buffering clients against the extremes of market volatility.  Factors are attributes of stocks that have been shown over time to outperform the aggregate market. Such characteristics as Quality, Size, and Momentum work together to form the core of our long-term investment models. Helping to buffer against localized economic hurdles, we also employ a globally asset allocation, maintaining exposure to developed and emerging markets global as well as in the U.S. 

In volatile markets, the various factors often perform differently, helping to offset acute price declines in the broad portfolio and enhancing diversification.  Indeed, in the past quarter, these factors offered mixed results. In both the U.S. and International Developed Markets, Value, and Minimum Volatility were positive contributors. While in the Emerging Markets, Value, Minimum Volatility, and Small Caps outperformed, as defined by MSCI Factor Indices.3 

Meanwhile, as we contemplate elevated inflation that may last longer than originally expected, we will be looking to make some opportunistic purchases of individual stocks that should be best able to pass along price increases and maintain steady earnings. 

Index Disclosure and Definitions

Investors cannot invest directly in an index. Indexes have no fees. Historical performance results for investment indexes do not
reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the occurrence of which would have the effect of decreasing historical performance results. Actual performance for client accounts will differ from index performance.

S&P 500 Index represents the 500 leading U.S. companies, approximately 80% of the total U.S. market capitalization.

Dow Jones Industrial Average (DJIA) Is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.

The Nasdaq Composite Index (NASDAQ) measures all Nasdaq domestic and international based common type stocks listed on The Nasdaq Stock Market and includes over 2,500 companies.
MSCI World Ex USA GR USD Index captures large and mid-cap representation across 22 of 23 developed markets countries, excluding the US. The index covers approximately 85% of the free float-adjusted market capitalization in each country.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets (as defined by MSCI).  The index consists of the 25 emerging market country indexes.
Bloomberg Barclays US Aggregate Bond Index measures the performance of the U.S. investment grade bond market. The index invests in a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States – including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than 1 year.

Bloomberg Barclays Global Aggregate (USD Hedged) Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging market issuers. Index is USD hedged.

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The Kaminsky-Silverman Group utilizes Symmetry Partners, LLC (SP), which is a third party service provider that supplies market data and assists in creation and monitoring of factor-based investment models.  SP is also an investment advisory firm registered with the Securities and Exchange Commission. All data is from sources believed to be reliable but cannot be guaranteed or warranted. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, product or any non-investment related content made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may not be reflective of current opinions or positions. Please note the material is provided for educational and background use only. Moreover, you should not assume that any discussion or information contained in this material serves as the receipt of, or as a substitute for, personalized investment advice.

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