In the first quarter of 2022, we have seen high inflation, rising interest rates, and unthinkable human tragedy in Russia’s war on Ukraine. The financial markets do not like uncertainty, and they certainly had their fill of it in the first quarter. Nearly every area of the global stock and bond markets saw negative returns for the year, some in the double-digit range. Not even the bond market helped investors this quarter, with fixed income seeing its worst quarterly loss since 1980.
One of the few areas of the market that remained unscathed was energy. The price of oil skyrocketed during the quarter, given supply constraints due to the Russia/Ukraine war. President Biden recently announced the U.S. would be releasing an unprecedented 1 million barrels per day from its strategic petroleum reserves in an attempt to alleviate price pressures.
Oil wasn’t the only area that saw price increases during the quarter. Broad inflation, as measured by the Consumer Price Index (CPI), hit a 40-year high in February rising 7.9 percent year-over-year. Consumers felt the brunt of this in the form of higher prices at the grocery store, gas pumps, restaurants, and travel.
Partly in an effort to curb inflation, the Federal Reserve (Fed) raised interest rates by 0.25 percent at its March meeting. Despite being the first interest rate hike in three years, it wasn’t a surprise as the Fed has been indicating an interest rate increase was forthcoming. While expectations vary on the number and magnitude of further rate increases in 2022, we are no doubt entering a quantitative tightening cycle.
The U.S. economy grew at a respectable pace in the fourth quarter of 2021 at 6.9 percent annualized, but first-quarter growth is expected to be much lower. Inflation, waning fiscal stimulus and the spread of the Omicron variant early in the year took a toll on growth. The Federal Reserve is forecasting GDP growth of 2.8 percent for the full year 2022. On a bright note, the labor market remains a source of strength for the economy with unemployment falling to 3.6 percent in March. Roughly 90 percent of the 22 million jobs lost during the pandemic have since recovered.
Outside of the U.S., the economic effects of the Russia invasion of Ukraine have been painful in Europe, which relies more heavily on Russia for oil and natural gas than we do here in the US. Elevated energy prices are weighing on both economic growth and inflation. These challenges are placing the same pressures on the European Central Bank as we are seeing here in the U.S. Meanwhile, in Asia, China has struggled with a resurgence in covid cases and re-imposed lockdowns. China GDP growth is estimated to be 5.5 percent in 2022, below 6 percent for the first time in 30 years.
We will most likely see continued volatility in both the equity and bond markets as we progress through the coming months. Barring a large economic shock, the Federal Reserve will likely continue its interest rate increases and overall tightening policy. Broad expectations are that inflation will subside as we progress through the year. No one has a crystal ball to know what lies ahead for the Russia/Ukraine war, but global economic growth will be negatively impacted, at least in the near term. While there is chatter about recession in the future, that remains to be seen.
What Does This Mean For You?
While the first quarter’s events may leave you somewhat pessimistic as to what lies ahead for the markets, we need to remember there will always be bumps in the road over the longer term. The current backdrop of volatility highlights the importance of maintaining a prudent asset allocation that is consistent with your long-term financial plan.
Domani Wealth helps our clients financially prepare for life’s challenges, whether it be market volatility, life’s transitions, or changing goals. We walk side by side with you to help you feel comfortable in your financial future.
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