For the first time in 2 years, we are writing this letter with the market lower than it was last quarter. When it comes to investing, there is not much we can promise, but one thing we can confidently say is that it will not be the last time. Wall street had several major issues to deal with as we began the first quarter of 2022. Though January began with positive momentum as we touched all-time highs, the markets quickly realized they would be forced to deal with rising inflation, an increase in interest rates, and a covid wave that was spreading like wildfire in other parts of the world. This led to the worst first month performance since 2009 as January saw the S&P 500 dip 5.3%, the Nasdaq 9%, and the Dow 3.3%.  Rising inflation and a steady increase in oil prices led people to question if the Fed had gone too far in stimulating the economy and what actions may be needed to get inflation back under control.  

Just as fears began to ease and stocks began inching back, a new crisis emerged: Russia’s invasion of Ukraine. In an attempt to deter further aggression and cripple the Russian economy, global sanctions were placed on Russia. Though the main impact will be felt by Putin and his country, this also put the world on the cusp of possible global energy and food shortages, as Russia and Ukraine are critical producers of each. Forced to entertain the idea of a World War coinciding with rising rates and strong inflation, the markets were left in flux. Markets hate uncertainty: with global economies facing it in heaps, all three indices finished the month down more than 3%. Negative momentum continued into March as peace talks failed and the war in Ukraine intensified. There were whispers about how the Fed would handle their March meeting, but after a 25bp hike and a roadmap of future hikes, a few of these uncertainties were answered, leading to a market rally of ~10% to close out March. Included in that stretch were four straight days of +1% moves in the S&P 500, which historically has led to strong market performance over the next 6 and 12 months; a highly welcomed positive trend. Overall, the S&P finished the quarter down 5%, the Nasdaq 9%, and Dow down 4%.  

Energy unsurprisingly carried the quarter with the sector up over 37%. Utilities were the only other sector in the green, which ended the quarter up 4% as some investors reallocated to the more defensive sector. Communication services, consumer discretionary, and information technology were the three worst performing sectors, falling 12.1%, 9.2%, and 8.6% respectively. Financials showed relative resilience as beneficiaries of rising interest rates, finishing the quarter down less than 2%. 

Ultimately, there is still trepidation associated with the Fed’s hawkish mindset, the Russia-Ukraine situation, high inflation, rising interest rates, and now the Covid lockdowns in Shanghai. However, these Macro concerns do not necessarily mean conditions will be negative. Inflation is at its highest level in 40 years, but it has been aided by the pandemic shutdowns, supply chain issues, and geopolitical events, which could moderate as we navigate the year. Recently, there has been much written about an inverted yield curve, as the 2-year Treasury yield briefly topped the 10-year. Historically, these inversions have been indicators of recessions, which Reuters now estimates has a 40% chance to happen in 2023. It is worth noting that recessions are not always imminent upon inversion; the four previous inversions of the 10 and 2 have seen the market continue to rally an average of 28.8% over an average of 17 months post inversion before a recession begins. Of course, history does not always repeat itself, but as Mark Twain said, “it often rhymes.” As we stand now, the US consumer is still very healthy, as total household net worth is significantly higher than the pre-pandemic trendline. GDP continues to grow and earnings should continue to drive markets, as they are expected to grow well above long-term trends. Though we expect volatility to continue as we navigate these headwinds, there is no reason to panic. Regardless of intermediate performance, we remain confident that daily volatility should have little impact on long-term investors. As Peter Lynch says, “Know what you own and why you own it,” which could not be more apt in times like these. The best way to endure the swings is to own high-quality companies, stay diversified, and maintain a long-term approach. Having strong conviction in the positions you own allows you to be confident amid short-term turmoil, which is why we place such an emphasis on owning quality. Markets have obviously performed very well, and there are signs of turbulence ahead. However, if these warning signals prove to be accurate, it could present more opportunities to deploy capital to our high-conviction investments at discounted values, something we have not been able to do the last 18 months. Either way, we continue to feel positive about our long-term strategy. As Warren Buffet so perfectly put it, “never bet against America.” 

John Webb 

Financial Advisor 
Pinnacle Asset Management
Raymond James Financial Services 

Kidd Private Wealth Group