Market Volatility Rattles Investors’ Nerves in Q1
The first quarter saw a significant increase in market volatility. Russia’s invasion of Ukraine, piping hot inflation, and rapidly rising interest rates all came together to push markets lower across the board. Global economic sanctions levied against Russia led to steep declines in the ruble as Russia’s capital markets ceased operating; oil and other commodities prices soared, fueling already high global inflation. Here at home, February’s monthly Headline CPI reading of 7.9% in year-over-year inflation led the Federal Reserve to sharpen its hawkish, anti-inflation stance and raise interest rates 0.25% at its March meeting. The 10-year U.S. Treasury, which began the year at 1.52%, rose sharply to finish the quarter at 2.32%.
Subsequently, most major asset classes posted negative returns for the quarter. The MSCI All-Country World Index returned -5.26%; U.S. stocks posted virtually the same return at -5.28%. The S&P 500 faired only slightly better, returning -4.6% for the quarter. Notably, 9 out of 11 sectors posted negative returns for the quarter; only energy (+39%) and utilities (+4.8%) posted positive gains and were two relatively bright spots in an otherwise dour quarter. Emerging Markets posted slightly lower returns of -6.92%. Bonds offered no respite from the quarter’s declines; the Barclays US Aggregate Bond Index returned -5.93%, giving up some of its abnormally high, pandemic-fueled gains from the previous two years. Non-U.S. bonds posted similarly negative returns with the Barclays Global Ex-US Bond Index returning -6.28% for the quarter.
Lessons for Investors
Despite the first quarter’s broad declines, we believe the quarter offers three major lessons for investors.
- Markets react quickly to new information. Trying to time markets based on geopolitical events, inflation, or other information can be dangerous and counterproductive. Markets move quickly, far faster than the click of a mouse. For a summary of how quickly markets responded to sanctions-related news on February 24, see our article titled “The Ukraine Crisis: Three Lessons for Investors” on our website under Insights.
- Geopolitical selloffs are typically short-lived. A review of major geopolitical crises since 2000 shows markets had fully recovered within one month. Similarly, while global equity markets sold off sharply in the days following the onset of Russia’s invasion, the MSCI All-Country World Index was actually 4% higher by the end of the quarter than before the invasion.
- Investors should diversify not because of what they expect but to protect against what they don’t. Markets offer many humbling lessons to the overconfident. Foremost among those is the evergreen lesson that, no matter how confident we are in our expectations, it’s the unexpected that tends to dominate our lives and, ultimately, impact our portfolios. How many investors entering the year thought Russia would invade its neighbor? That Facebook (now Meta) would lose nearly 34% of its market value in the year’s first 90 days? Or that Bitcoin would decline over 30% from its November high? Rather than take outsized, concentrated bets on individual companies or engage in highly speculative trading strategies, investors are better off maintaining a disciplined, long-term perspective and diversifying broadly across and within global asset classes.
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1 Russell 3000 Total Return
2 MSCI Emerging Markets Total Return
2 See “The Ukraine Crisis: Three Lessons for Investors”
4 YCharts, Inc.
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