Outlook | AIM

Quarterly Market Review as of 3/31/2022

Written by Brian Huckstep, CFA, CFP®, Chief Investment Officer

Asset Class Recap

Stock market prices rebounded a bit in March to temper losses from January and February. The chart below shows the level of the S&P 500 index over the last two years. At the far right, you can see the January and February pullback and the partial rebound in March. Rising interest rates, the war in Ukraine, high inflation, and a new flare-up of COVID in China have dominated financial press headlines as leading causes of market concern in 2022.

Source: S&P Dow Jones Indices

Bonds have fared worse than stocks so far in 2022, with the Bloomberg US Aggregate Bond index posting negative returns for the last four consecutive months (Dec 21, Jan 22, Feb 22, and March 22). When prevailing interest rates rise, prices for fixed coupon bonds drop. As the US Federal Reserve has announced that they plan to increase interest rates more quickly than many investors expected to help fight inflation, the price drop for bonds has been unusually swift, outpacing the coupon payments these bonds pay to investors each month or quarter. The upside of higher interest rates for bond investors is higher coupon payments in the future after matured bond principal is reinvested. Investors in CD’s should see the same rising rates and higher yields.

This interest rate to current price relationship (known by bond experts as Duration) impacts longer term bonds more strongly than intermediate and short term bonds. The table below shows that Intermediate / Aggregate Bonds are down 5.9% year-to-date while Long Term Bond prices are down more than 10%. While longer term bonds are generally more attractive than intermediate and shorter term bonds because they pay higher interest rates, their downside is that they can have periods of strong negative performance when rates rise. For that reason, longer term bonds can an appropriate investment to achieve long term goals (over five years away), however, they may disappoint for short term goals and conservative portfolios.

Returns for each of the asset classes we include in our long term core diversified portfolios are listed below.

Source: Morningstar

Often, market events and subsequent price changes impact asset class returns broadly and most sectors move roughly in unison or at least in the same direction. That has not been the case recently, as the table below shows. S&P Dow Jones assigns each of the 500 stocks in the S&P 500 index into one of 11 sectors. They track total return for each of the sectors. The table below displays returns for each of the last 5 years, for Year to Date, and for 1, 10, and 20 years for each sector. The Year to Date returns in the bold column show how Energy stocks have shot up in 2022 as well as 2021, after four consecutive years of underperformance - classic “reversion to the mean”. Portfolios that focus on Environmental, Social, and Governance issues (ESG oriented products) face headwinds to performance in this type of market because they underweight or overtly exclude oil related stocks.

Source: Morningstar. Returns longer than 1 year are annualized.

Market Expectations

Although we always invest with a focus on the long term, we want to understand short and mid term market risks. The market is generally a good voting machine, balancing potential positive factors and potential negative factors to arrive at fair market prices for securities. As news happens, it is absorbed by market participants each day and very quickly factored into updated prices. The graphic below lists some events that are currently weighing on market prices and creating uncertainty, both on the positive and negative sides. Returns for the remainder of 2022 will in part depend on how these events work themselves out.


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Written by Brian Huckstep, CFA, CFP®, Chief Investment Officer