Q1 2022 Recap
April 8, 2022
You are likely familiar with the old adage, “If March comes in like a lion, it will go out like a lamb.” This bit of weather-related folklore is based on optimism that a late winter’s roar will soon give way to gentler spring-like temperatures as April approaches. Or, as the Farmer’s Almanac more temperately observes, “We can only hope that if March starts off stormy it will end on a calm note - but the key word is hope.”
Lamentably, hopes for an early spring thaw have been dashed this year, as least for the geopolitical climate. Russia invaded Ukraine in February, and the largest conventional war in Europe since World War II continues unabated today with profound implications for global economics and financial markets. While our intent is not to downplay the horrors of the relentless shelling of Ukrainian cities and the alleged atrocities being committed by Russian forces, our focus in this update is on the investment implications of the Ukraine situation for financial markets and your investment portfolios.
“So many mists in March you see, so many frosts in May will be.”
In our last two quarterly reviews we discussed the potential for elevated inflation and a more volatile stock market this year. While it remains possible that at least some elements of inflation may prove transitory, in the intermediate term the war in Ukraine greatly amplifies ongoing inflationary pressures in a number of key global commodity markets. Energy is the most obvious of these, as Russia was the world’s largest exporter of natural gas in 2021, and the second largest crude oil and condensates exporter after Saudi Arabia.
Likewise, Russia and Ukraine are widely viewed as Europe’s breadbasket, together accounting for almost 30% of global wheat exports, 20% of corn exports, and 80% of the world’s supply of sunflower oil. With exports from Ukraine halted by the Russian invasion, and exports from Russia curtailed by global sanctions, “it’s as if Iowa and Illinois, the heart of US grain production, were ripped off the map,” as online magazine Wired phrased it.
Prior to Russia’s invasion of Ukraine, economic headwinds had already been picking up here in the US, thanks to a newly inflation-hawkish Federal Reserve. Having swiftly enabled unprecedented monetary and fiscal stimulus during 2020’s pandemic downturn, the Fed has since been slow to take its foot off the gas pedal. They now find themselves in the unenviable position of having to step firmly on the economic brakes in an attempt to quash the runaway inflation that they, in part, helped foment.
The Fed did raise interest rates in March, lifting the Fed Funds target by 0.25% with additional hikes expected as soon as next month. The Fed is further threatening to begin “Quantitative Tightening” by letting the US Treasuries and mortgage bonds it had purchased in recent years mature – or perhaps even selling a portion of them outright. Credit markets have responded with dismay at the Fed’s new inflation-fighting stance, sending bond prices lower and pushing 30-year fixed rate mortgages over 5% for the first time since 2018. The rate was 3.38% one year ago.
Against a backdrop of persistent global inflation, ongoing supply chain disruptions and higher borrowing rates, the likelihood of an economic slowdown has surely increased. That said, our base outlook does not envision a severe economic recession in the US, largely because we are starting from a position of unusual strength: Unemployment is near post-WWII lows and job openings are at multi-decade highs. US corporate profit margins are near all-time highs as well, and interest rates, while rising, are still low by historical measures. Moreover, Wall Street’s forecast for US Gross Domestic Product (GDP) in 2022 is a positive 3.4%, down from the 5.7% pace achieved in 2021 but far from contractionary levels.
Overseas economies may experience greater difficulty, at least in the near term. Europe’s dependence on Russian gas, India’s reliance on Russian grain, China’s burdensome real estate debt levels and the new Covid lockdown in Shanghai are significant hurdles to overcome. In client portfolios we remain underweight international markets relative to global indices. Our tilt to growth over value in developed countries has worked well in past years, though it has hampered returns recently. Similarly, in emerging markets we have targeted low exposure to state-owned commodity-centric holdings, though this positioning has worked against us in recent quarters. While we expect more favorable investment conditions in the course of time, volatility may persist in the foreseeable future.
As mentioned in our last quarterly update, though for different reasons at the time, we do anticipate muted returns in traditional investment markets for the next several years compared to past periods. We continue to evaluate non-traditional asset classes that may provide relatively attractive returns compared to equities. Similarly, in anticipation of now-rising interest rates, we have targeted our fixed income allocation on high quality short-term bonds which are less volatile than those with longer maturities and higher credit risk. And as always, we reposition portfolios where asset class weightings may be over or under their strategic long-term allocation targets.
There are uncertainties to any outlook and surprises may happen, in the markets and in our personal and professional lives. We encourage you to reach out at any time to discuss your portfolio to ensure your mix of assets is appropriate and aligned with your financial goals.
With sincere hope for a more temperate global climate in the coming months,
Mitch Schlesinger, Equity Strategist
 Farmers’ Almanac, “March Weather: In Like A Lion, Out Like A Lamb?,” 3/14/2022
 Downs, William M., “March 2022: …In Like a Lion”, Gardner-Webb University, 2/28/2022
 “Dictionary of Proverbs,” George Latimer Apperson
 US Energy Information Administration, 3/14/2022
 Wired online, “The War in Ukraine Is Threatening the Breadbasket of Europe”3/11/2022
 CNBC, “30-year fixed mortgage crosses 5%” 4/5/2022
 “Guide to the Markets,” JP Morgan, 3/31/2022, pages 8, 24, and 25.
 FactSet, data as of 4/7/2022
Blog commentary and opinions expressed herein represent a snapshot in time and are subject to change. Any discussion or information contained in this blog does not serve as the receipt of, or substitute for, personalized investment advice from Evermay.