First Quarter Commentary

Our firm’s mission, Bringing Together Money and Meaning, keeps us acutely aware of the interplay between financial markets and real, human experiences. We cannot deliver market commentary this quarter without writing about the war in the Ukraine or inflation, but we would be failing at our mission if we didn’t pause first to recognize that the market impact fails to compare to the hardships suffered by those effected. While we will focus on the market, we do so with a keen perspective that the human experience is much vaster than anything explained in this commentary.

Inflation continues to be a strong headwind on the market with Q1 inflation running around 7.8% at the end of February. The market spent much of the first quarter anticipating an increase in rates, which the Federal Reserve began to deliver in March. The 10-year treasury yield started the year at around 1.5% and increased to 2.3% by the end of the quarter. With this rise in rates, the bond market registered a poor start to the year. Generally, bond prices decline as interest rates increase. If you are interested in learning more, consider reading Sarah’s Thoughts in Charts: Difficult Bond Start … Will it Persist?

The war in Ukraine added to inflation pressures as commodity prices surged. Emerging Markets and Developed Europe markets dropped sharply on concerns about the impact of the conflict. The US market also shuddered over considerations to the impact on the already stressed supply chains. When considering Ukraine under the investment lens, our Letter to Clients: Geopolitical Events and Your Investments continues to hold true.

Against this backdrop, the S&P 500, which is made up of the largest 500 US companies, hit its first market “correction” since March of 2020. A technical correction occurs when the market loses more than 10% from peak to valley. While historical data cannot be relied upon as a prediction tool, it’s worth mentioning that the S&P 500 historically corrects every 1.5 to 2 years. In that way, this correction was right on schedule. For some investors, this presents an opportunity to move into markets. If you’d like to learn more, you may consider reading Thoughts in Charts: The Cost of Fear.

The market hates unknowns more than it dislikes negative news. It also tends to move past negatives before they are fully resolved. We saw a glimpse of that in late March as the Fed posted their first interest rate increase, and the world settled into the news from Ukraine. The S&P’s correction turned sharply upward, ending the quarter down -4.6%.

While plenty of unexpected events have happened, we do see some of the familiar indicators of a late economic cycle where the market becomes more volatile, faces increasing interest rates, encounters full employment, and gets jittery about recessions. In a world of unknowns, we take some comfort in the familiar parts of the market cycle as they help us stick with our discipline.

As we look towards the rest of the year, we characterize it as one of many transitions: inflation, supply chain, foreign conflicts, COVID surges, and market cycles. Because of these transitions, the uncertainty they create, and the downward pressure that they can produce in markets, we prepare ourselves and our clients for a period of market consolidation that will look different than the past two years. We encourage patience and prudence over the next year as these transitions fall into place. Transitions are necessary, and frankly not always unexpected. If we look to the past, we can see that historically periods of transition ultimately led to renewed periods of prosperity.  This allows us to remain positive and long-term in our thoughts, which we believe makes for sound investing.

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