Contributors: Andrew Walker, Bruce Ensrud, Matt Stockman 


At the start of the year, in response to concerns around rising inflation, markets began rapidly pricing in MORE rate hikes at a FASTER pace by the Federal Reserve than previously anticipated. This backdrop of inflation-driven volatility was exacerbated in February when Russia invaded Ukraine, and COVID still remains a looming concern. In aggregate, this sent interest rates soaring, and both stock and bond prices falling. Not only is it rare for these categories to be down in tandem, but 2022 marks one of the worst starts to a year either has ever had.

Amidst heightened volatility and uncertainty, perspective is key. The US economy has been resilient, the labor markets are strong, the US consumer is very healthy, and historically speaking, market returns tend to be favorable following periods like the tough start that we have had to the year. Beyond this, history tells us that bowing to our own behavioral biases like fear can result in making unwise decisions such as not staying invested through tough times.

Where do we go from here? We will:

  • Average new dollars into the market over time (versus all at once) to minimize entry point risk.
  • Hold extra cash in portfolios with liquidity needs to avoid the possibility of selling investments at depressed prices.
  • Focus on high quality, value-oriented companies that are more resilient in inflationary, rising rate environments.

Where We’ve Been – 2022 Q1 Review

Waning impacts of COVID and a reopening global economy led to stellar market performance last year. 2022 began with a similar tune, along with an enhanced focus on expected Federal Reserve rate hikes to fight inflation. In fact, almost immediately upon the start of the new year, markets began aggressively pricing in MORE rate hikes at a FASTER pace than previously anticipated.  This sent interest rates soaring.

While rising interest rates (which hurt bond prices) usually indicate a growing economy (that supports stock returns), today’s rising rate environment is more a function of federal reserve rate hikes and inflation, not of growth. As a result, not only have bonds been negatively impacted by their inverse relationship with interest rates, but stocks have also repriced downwards. This dynamic where bonds and stocks are both down at the same time has been rare throughout history.

Complicating everything has been the tragedy that has unfolded with Russia’s invasion of Ukraine. The war, along with sanctions put on Russia by western countries, has sent prices climbing in commodities produced in the region (oil, gas, wheat, etc.). These price increases have, in turn, created ripple effects across the entire world as economies and businesses adjust to absorb this burst of inflation.

First quarter returns, which are uniformly negative outside of the US Dollar, are shown below.

Market CategoryMarket IndexQ1 2022 
US Large CapS&P 500-4.6%
US Small CapRussell 2000-7.8%
International DevelopedMSCI EAFE-5.8%
Emerging MarketsMSCI Emerging Markets-7.0%
US BondsBB US Aggregate-5.9%
US DollarDXY*2.8%
Source: BlackDiamond | *Yahoo Finance

Where We’re Going – 2022 Q2 Outlook

Volatile interest rates and inflation – and the corresponding impacts on those variables by Federal Reserve policy along with the ongoing situation in Ukraine – will be the main drivers in markets through year end. The uncertainty of these dynamics, and the important influence they will ultimately have on economic growth, will cause markets to be volatile. It is quite possible that inflation will begin abating later this year, although the Russia-Ukraine conflict makes this hard to predict as it has:

  1. complicated the healing of global supply chains,
  2. accelerated inflationary pressures in energy and agricultural commodities, and
  3. fueled the worldwide deglobalization trend started by COVID.

Given this, we find it prudent to continue prioritizing large, high quality, value-oriented companies as they tend to be more resilient in environments of inflation and rising interest rates. In fact, thus far in 2022, stocks in these categories have held up very nicely. In bonds, we will seek to take advantage of higher yields where doing so makes sense.

So long as volatility remains high, we will continue to dollar-cost-average new money into the market over a period of several months, to reduce entry point risk. For portfolios with liquidity needs, we will continue to hold excess cash to avoid the situation where liquidity demands require asset sales at depressed prices

Thank you for allowing us to partner with you as we navigate the ever-changing market. We appreciate your continued trust.

If you have questions or would like to dive deeper into this quarter’s outlook, please reach out to our investment team. We’d be happy to set up a virtual coffee to talk more.

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The Bloomberg U.S. Aggregate Bond® Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the U.S. bond market.

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The U.S. Dollar Index – known as USDX, DXY, DX and USD Index – is a measure of the value of the United States Dollar (USD) against a weighted basket of currencies used by U.S. trade partners. The index will rise if the Dollar strengthens against these currencies and fall if it weakens.