Highlights from the Global Markets in 1Q22

U.S. Equity: The S&P 500 Index fell 4.6% for the quarter, but it was down more than 12% early in March before staging a rally into quarter-end. Value stocks sharply outpaced growth across capitalizations, with the spread exceeding 10% in both mid and small caps and just over 8% in large caps.

Not surprisingly, Energy (+39%) was the best-performing sector given a 33% spike in WTI crude oil prices. The defensive Utilities sector (+5%) also posted a positive result. Communication Services (-12%), Consumer Discretionary (-9%), and Information Technology (-8%) were the worst-performing sectors.

Small cap stocks (Russell 2000: -7.5%) underperformed large (Russell 1000: -5.1%).

Global ex-U.S. Equity: The MSCI ACWI ex-USA Index fell 5.4% for the quarter but saw mixed performance from its constituents. Norway (+10%), Australia (+7%), and Canada (+5%) were helped by soaring commodity prices while Japan (-7%) and Europe ex-U.K. (-10%) posted sharp declines. Europe was hit hard by the war in Ukraine, which led to higher energy prices and worries over the impact on its economic recovery. Japan suffered from higher import costs as a result of surging energy prices.

As in the U.S., value outperformed growth by a wide margin (EAFE Value: +0.3%; EAFE Growth: -11.9%) and small cap (EAFE Small Cap: -8.5%) also underperformed. The yen (-5%), euro (-2%), and pound (-3%) weakened vs. the U.S. dollar.

Emerging Markets: The MSCI Emerging Markets Index fell 7.0% for the quarter but results were mixed across regions. Latin America (+27%) fared well on the back of rising oil prices while Emerging Europe (-71%) plunged, reflecting Russia’s -100% return before it was removed from the Index. As in developed markets, value outperformed growth (EM Value: -3.4%; EM Growth: -10.3%).

From a country perspective, China (-14%) fell for the third consecutive quarter, hurt by the spread of COVID, regulatory crackdowns, and a broad economic slowdown. Brazil (+36%), South Africa (+20%), and Saudi Arabia (+17%) were top performers on rising commodity prices. India (-2%), which is a large importer of oil, was hurt by rising energy prices.

U.S. Fixed: The Bloomberg US Aggregate Bond Index sank 5.9% over the quarter, the third-worst quarter since the index’s inception in 1976 (the other two being in 1980). Rates rose sharply on worries over inflation and expectations for Fed rate hikes. The 10-year U.S. Treasury closed the quarter at 2.32%, up from 1.52% at year-end. Notably, the yield curve flattened meaningfully and as of quarter-end the relationship between the 5-year yield (2.42%) and the 10-year yield (2.32%) was inverted. Against this backdrop, TIPS (Bloomberg TIPS: -3.0%) did relatively well as inflation expectations rose.

High yield corporates (Bloomberg High Yield: -4.8%) outperformed investment grade corporates given less sensitivity to interest rates, and bank loans (S&P LSTA Leveraged Loan: -0.1%) were helped by their floating rate coupons and low duration.

Global ex-U.S. Fixed: Rates rose across most developed markets and led to broad-based negative returns. The U.S. dollar strengthened vs. most developed market currencies. The Bloomberg Global Aggregate ex-US Bond Index fell 6.1% unhedged and 4.1% hedged.

Emerging Market Debt: The U.S. dollar-denominated JPM EMBI Global Diversified Index fell 10.0% over the quarter as rates in the U.S. rose. Latin America (-6%) and Africa (-4%) were among the better-performing regions as commodity prices soared. The local currency-denominated JPM GBI-EM Global Diversified fell 6.5%, helped in relative terms by currency appreciation from commodity exporters (Latin America: +7%; Middle East/Africa: +8%). Emerging Europe (-32%) reflected Russia’s removal at $0 (-100%).

Municipals: The Bloomberg Municipal Bond Index fell 6.2%, its worst quarter since 1981, as yields rose sharply. Lower-quality bonds underperformed for the quarter, and the municipal bond yield curve flattened. Supply was down vs. 2021, but heavy outflows put further pressure on the sector. Overall, credit quality remained stable to improving as tax revenues rose. Illinois and New Jersey were upgraded during the quarter.

Real Assets: Commodities were a rare bright spot given their inflation-protection properties as well as war-induced supply concerns. The Bloomberg Commodity TR Index soared 25.5% and the energy-heavy S&P GSCI climbed 33.1%. Gold (S&P Gold Spot Price Index: +6.9%) and listed infrastructure (DJB Global Infrastructure: +3.2%) outperformed global stocks and bonds. TIPS (Bloomberg TIPS: -3.0%) fell but outpaced nominal U.S. Treasuries as inflation expectations rose.