Financial market performance since the start of the year, and in particular since the end of the first quarter, has been sobering to put it mildly. While these type of market gyrations are never fun, it may be helpful to provide some context. In the last ten years, there have been just two quarters when the S&P 500 index declined by more than 10%. Think about that for a moment! And one of those quarters was at the start of the pandemic. Simply put, financial markets have been behaving favorably for too long and investors have become unaccustomed to the volatility. However, market volatility is normal and is healthy in the long run.
Markets are currently reacting to an enormous set of changes in a compressed period of time: the on-going pandemic, the outbreak of war, supply chain disruptions (made more challenging by the war), high inflation (made incredibly more challenging by the war), and changes in monetary policy.
There were very few places to hide during the first four months of the year. Equities across the board struggled: the S&P 500 index -12.89%, MSCI EAFE index (Developed Markets) -11.74%, MSCI Emerging Markets index -12.10%. Bonds also had a difficult few months: the Bloomberg Municipal Bond Index -8.82%, the Bloomberg U.S. Intermediate Aggregate Index -7.09%.
Pretty much the only areas of the market that have performed well this year include energy and just about anything commodity-related. However, their recent performance is almost entirely due to the war in Ukraine. If there was a sudden end to the conflict, many commodity prices would be highly vulnerable to a significant pullback. Moreover, investing in commodities directly remains extremely risky since it is essentially speculation as commodities do not generate cashflows and are inherently volatile.
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