• IAP, LLC

Market Commentary - Q1 2022

The two-year rally in stocks, supported by pandemic-fighting government stimulus, came to a grinding halt during the first quarter of 2022. Worldwide events including the invasion of Ukraine by Russia, a spike in oil prices, higher inflation and central bank increases to interest rates all likely had an effect on stock prices recently.

But why?

When events like those occur, investors recalibrate the expected future profits of companies. As expectations of future profits change, so does the price of the stocks of the companies for whom those expectations change. The combination of recent factors has been generally negative for stocks (absent oil companies and some others). And that’s why prices have gone down recently. Those who like to make narrowly focused investments, such as buying just Russian stocks (available as a US based ETFs), likely lost their entire investment as the Russian stock market closed and those ETFs were suspended from trading.

The Federal Reserve finally raised short-term interest rates and indicated they are likely to do so several more times this year. Yields on the benchmark 10-year US Treasury rose from about 1.5% to 2.5% recently. Prices of bonds go down when interest rates go up, and that has happened across the bond market. US bonds logged their worst quarterly decline since 1980. Also, the yield curve has inverted (shorter maturity rates are higher than longer-term rates right now). This “inversion” often precedes a recession; stay tuned.

Although the chart below doesn’t break out value vs. growth stocks, the value style has been outperforming lately after a long period of trailing growth style stocks.

It is not easy to tune out the flow of constant information, especially about finance and investments. Acknowledgement that the future is unpredictable and prices reflect all current knowledge is a sound foundation for disciplined investing.

Returns ending 3/31/2022