First Quarter 2022 Market Recap
In the real world, no one has ever been given the ability to see that a particular time is the best time to buy stocks. Without a saving faith in the future, no one would ever invest at all. To be an investor, you must be a believer in a better tomorrow. Jason Zweig, WSJ columnist.
The first quarter of 2022 was a stark reminder that the market’s steady ascent since March 2020 was bound to get more difficult. Last quarter, we cautioned that “investors need to prepare for an era of monetary policy (in which) markets are likely to be more volatile in response to changing Fed policies.” Tragically, Russia also followed through on its threat to invade Ukraine, which has led to a spike in commodity prices and multiple rounds of sanctions. Combined, these factors led to a volatile downside quarter for both stocks and bonds.
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No amount of sophisticated game theory can predict the short-term impact of geopolitics on markets especially when it involves a high stakes regional war. There are, though, three long-term trends that seem more probable due to the war and the COVID era that preceded it: (1) supply chains will be shorter and more robust in terms of the number of suppliers; (2) European defense spending will be higher; and (3) the weaponization of the US dollar will cause some actors who are ideologically opposed to the West to seek alternatives.
While the trends above are generally inflationary, the question remains…is the current rate of inflation structural or transitory? A recent paper by the Federal Reserve Board of San Francisco attributes 3 percentage points of the current US inflation rate to fiscal stimulus from the CARES Act and the American Rescue Plan. As these programs fade, inflation may moderate without excessive rate increases.
It’s also comforting that earnings data remains positive for the coming year. For instance, despite the war in Ukraine, earnings per share growth for global companies as measured by the MSCI All Country World Index is expected to be +6% in 2022 according to FactSet. Prior to the invasion, the consensus expected 7% growth. As such, we believe the playbook should remain similar to last quarter – have faith in the future but maintain enough dry powder to capitalize on bouts of volatility in both the stock and bond markets.