In Q1 2022, we had several factors working in favor and against the market.
Please see two charts below - one pointing out that geopolitical events (like Russia’s attack on Ukraine) have a temporary impact on the markets.
The second chart shows how bond dividend yields are increasing. To fight inflation, the Feds began increasing interest rates in March, with a number of increases expected in 2022.
Jobs are plentiful, unemployment is very low, average compensation has been increasing at a significant rate. Many companies across many industries have been challenged with keeping job rolls full, and finding competent workers to fill positions. We’ve seen this with the financial service infrastructure that we depend on.
Yet, inflation is, for the moment, high. Inflation is normal (it’s not supposed to be zero) and over the long haul averages around 3% annually. For the moment, as measured nationally, compensation increases are not quite keeping up with inflation. But remember these numbers are averages across 50 states and hundreds of millions of workers. From our perspective, many states, regions, local areas have their own inflation rates and we think California’s cost on consumers rises faster than the national average. Each person/family has their own inflation rate and by applying consumer savvy, you can definitely reduce the impact their inflation by being a smart and flexible consumer of goods and services.
The economy is adjusting from a period of very low interest rates and huge sums of money injected into the economy, people getting paid to not work - to a less accommodative economy. Getting back closer to normal - a pretty large adjustment - and the market is adjusting to that.
Publicly traded companies continue to deliver strong profits. Economic measure are overall healthy with the exceptions of interest rates and inflation.
Both stocks (Russia/Ukraine) and bonds (interest rates increasing) were down moderately in Q1 2022.
Usually bonds are more of a safe haven, being flat or up when stocks are down, but the impending interest rate hikes caused bonds to go down - this is completely normal and expected. The good news is that bond yields are going up! Part of the “adjustment back to normal”. When considering total return bonds dropped less than it appears. See second image below.
Market reaction to GEOPOLITICAL events demonstrates resilience
Courtesy Vanguard
Bond yields have risen in the past two years, sharply in Q1 2022
Courtesy Vanguard
Our standard models were down 3% to 6% from most conservative to aggressive, therefore our more conservative investors did experience less volatility. Our “social” models were down 4.5% to 7% with their lower diversification and higher expenses impacting the results. And conservative investors in the social models also experienced less volatility.
See our 2-page perform summary for the standard models here and the social models here.