The first quarter has been difficult for investors. To put things into broader perspective, Q1 of 2022 was the first negative quarter since Q1 2020. Historically, we typically don’t experience weak starts to the year, but the onslaught of headwinds to kick off the year have undoubtedly put pressure on markets. The silver lining to the quarter was the strong finish as the back half of March provided, to some extent, a relief rally to equity investors.
There hasn’t been just one theme that has contributed to the weak performance to start the year but many. Discussions to begin the year surrounded ‘the pace in which global central banks’ would increase interest rates, which transitioned into the impact of the Russia-Ukraine war on risk assets and now has moved on to ‘whether the odds of a recession have increased’ spurred by the very brief inversion of the U.S. Treasury 10 – 2 year interest rate curve.
As the year progresses, I remain in the camp that continues to believe that the Fed will raise interest rates less than the 6,7,8 times that’s currently being priced in and that Russia-Ukraine tensions will eventually ease, leading to a pivot in the negative narrative that has unfolded since the start of the year. Over the next few months, the geopolitical premium built into oil prices today will likely begin to decline, but supply-and-demand dynamics will continue to support oil prices above US$90 a barrel as global economies continue to fully reopen leading into the summer and production remains limited. A change toward a less hawkish sentiment coupled with a good (although weaker) fundamental backdrop provides a positive path forward for equity returns. The key to success in investing is to stay focused on what matters and understand the environment so that you can adjust to the changes if necessary.
Enjoy our monthly Market Perspectives as we dive a little deeper in the markets, discuss bonds, the economy and the U.S. Federal Reserve.