INFLATION, GEOPOLITICS AND RISING RATES WEIGH ON MARKETS IN THE FIRST QUARTER.
First Quarter Market Recap
After an historically calm 2021, volatility returned in the first quarter of 2022, as inflation surged to 40-year highs, the Federal Reserve promised to raise interest rates faster than previously thought, and Russia surprised the world with a full-scale military invasion of Ukraine, marking the first major military conflict in Europe in decades. Those factors fueled
a rise in volatility and pushed stocks lower in the first three months of the year.
Markets remained volatile in early March, as hopes for a relatively quick ceasefire in Ukraine faded and commodity prices stayed elevated. Shortly after Russia’s invasion, the developed world imposed crushing economic sanctions on the Russian economy. But while that demonstrated unity against Russian aggression, it became clear sanctions would also have a negative impact on Western economies, especially in the EU, and that raised concerns about a global economic slowdown.
However, stocks mounted a strong rebound in late March thanks to incrementally positive geopolitical and monetary policy news. First, the Ukrainian resistance stalled the Russian advance, and while the situation there devolved into an intense humanitarian tragedy, fears of the conflict extending beyond Ukraine faded over the course of the month. Then, on March 16, the Federal Reserve raised interest rates by 25 basis points, the first-rate hike in over three years. But the rate hike was no worse than markets feared, and that provided a spark for a “relief rally” in stocks that produced a solidly positive monthly return for the S&P 500 and carried the major indices to multi-week highs by the end of the quarter.
Second Quarter Market Outlook
As we start a new quarter, markets are facing the most uncertainty since the pandemic, as headwinds from inflation, less-accomodative monetary policy, and geopolitics remain in place. Inflation remains high and with major commodities such as oil wheat, corn, and natural gas surging in response to the Russia-Ukraine war, it’s unlikely that key inflation indicators like the Consumer Price Index will meaningfully decline anytime soon. Until there is a definitive peak in inflation, the Federal Reserve is likely to continue to aggressively raise interest rates, and over time, higher rates will become a drag on economic growth.
Geopolitical implications have spread beyond the battlefield, as relations between Russia and the West have hit multi-decade lows. The longer all these factors persist, the greater the chance we see a material slowdown in the global economy.
But while clearly there are risks to portfolios as we start the new quarter, it’s also important to note that the U.S. economy is very strong and unemployment remains historically low, and that reality is helping support asset markets. Additionally, interest rates are rising but remain far below levels where most economists forecast that they will begin to slow the economy. Finally, consumer spending, which is one of the main engines of growth for the U.S. economy, is robust, and corporate and personal balance sheets are healthy.
In sum, the outlook for markets and the economy is uncertain, and we should all expect continued volatility across asset classes in the short term. But core macroeconomic fundamentals remain very strong while U.S. corporations and the U.S. consumer are, broadly speaking, financially healthy. So, while risks remain, as they always do, there are also multiple positive factors supporting markets, and it is important to remember that a well-executed and diversified, long-term financial plan can overcome bouts of even intense volatility
like we saw in the first quarter.
At Brixton Capital Wealth Advisors, we understand the risks facing both the markets and the economy, and we are committed to helping you effectively navigate this challenging investment environment. Successful investing is a marathon, not a sprint, and even temporary bouts of volatility like we experienced over the past three months are unlikely
to alter a diversified approach set up to meet your long-term investment goals.
Therefore, it’s critical for you to stay invested, remain patient, and stick to the plan, as we’ve worked with you to establish a unique, personal allocation target based on your financial position, risk tolerance, and investment timeline. Rest assured that our entire team will remain dedicated to helping you successfully navigate this market environment. Please do not hesitate to contact us with questions, comments, or to schedule a portfolio review.