First Quarter 2022 Market Commentary

U.S. Gross Domestic Product (GDP) grew in the fourth quarter at an accelerated annualized pace of 6.9%, making 2021 the strongest full-year since 1984. Business spending and consumer activity led the gains, despite the continued strain from the COVID-19 pandemic. The 'advance' estimate for first-quarter GDP will be announced on April 28. Nonfarm payrolls rose by 431,000 in March, slightly below the Dow Jones estimate of 490,000, while the unemployment rate dropped to 3.6%. Strong employment growth has boosted consumer confidence in March after seeing declines in February and January; however substantial headwinds from geopolitical uncertainty and rising inflation have dampened consumer expectations.

Core CPI, which excludes food and energy prices, rose 6.5% for the year through March, while headline CPI, which includes all items, jumped 8.5%, the fastest annual gain since 1981. Heightened food, energy, and shelter costs accounted for much of the gain. Wages grew at an annual rate of 5.6%, not keeping pace with the cost of living. Food prices rose 8.8% over the year. Energy prices were also up, with gasoline prices increasing by over 18% in March. Supply chain issues remain a problem. Shelter costs are up 5% for the year through March as the housing shortage continues to drive up prices for home properties and rental markets.

The U.S. continues to impose sanctions on Russia amidst the invasion of Ukraine. President Biden signed a $13.6 billion funding bill to aid Ukraine, with the money going towards assisting refugees to flee the invasion and to defense equipment and training for Ukraine's military. Meanwhile, in Congress, the House of Representatives passed the Securing a Strong Retirement Act, also known as the Secure Act 2.0, which will now be moving forward to the Senate.

The Bloomberg U.S. Aggregate Bond Index fell 5.9% in the first quarter, with all fixed income sector returns struggling year-to-date. The only positive performing sector was 3-month T-bills, which were up 0.1%. Emerging markets bonds and investment-grade corporate bonds had the lowest returns, down 9.3% and 7.7%, respectively. The yield on the 10-year Treasury note ended the quarter at 2.32%, while the 30-year Treasury bond ended the quarter with a 2.44% yield.

The Fed approved a 0.25% interest rate hike in March and has signaled that this will be one of potentially many to occur this year, which could come at more aggressive increments of 0.5%. The central bank is expected to begin reducing its nearly $9 trillion balance sheet as early as May in order to address inflation risks. Inflation continues to exceed the Fed's long-term target of 2%.

The S&P 500® fell 4.6% to start the year, with all sectors, excluding energy and utilities, experiencing negative returns. Energy excelled for the quarter, up 39.0%, while utilities also had a positive return, up 4.8%. Communication services and consumer discretionary were the weakest sectors, down 11.9% and 9.0%, respectively. Despite negative absolute returns, value outperformed growth across the capitalization spectrum. The forward P/E for the S&P 500® ended the quarter at 19.5x, above the 25-year average of 16.8x, while the index's 10 largest stocks traded at 30.7x.

In the first quarter, U.S. markets modestly outperformed developed international markets and emerging markets (EM), despite all experiencing negative returns. The MSCI World ex-USA Index, which includes developed countries, and the MSCI ACWI ex-USA Index, which includes developed and EM countries, declined by 4.7% and 5.3%, respectively. With most markets seeing negative returns, EM equities declined by 6.9%, however, the Latin America region gained 27.3% for the quarter. China continued its decline, down 14.2% in Q1. Russia's market reopened after a month-long shutdown as widespread sanctions continue to hold.

Commodities outperformed all asset classes in the first quarter, jumping 25.6%, outperforming cash by nearly 25%. The remaining asset classes, typically offered by defined contribution plan sponsors, had negative returns. The Bloomberg Commodity Index increased as natural gas prices rose 31.5% and crude oil prices jumped 33.3%. The Russian war on Ukraine has a potentially significant impact on the global production of commodities, with Russia contributing 17% of the global production of natural gas and 12% of crude oil, and Ukraine contributing 10% of maize and 4% of wheat.

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