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Market Commentary

1st Quarter Market Commentary - What a Quarter It’s Been


In only three months, investors have dealt with a bear market in both the NASDAQ and small-cap indices, a nasty correction in the S&P 500 and bond market, the highest inflation reading in 40 years, near-record commodity prices, a dramatic turn to hawkishness by the Federal Reserve, a regional war that has strained food and mineral production, and a reshaping of energy and defense policy for Western Europe. Other than that, it was pretty quiet.

Financial Markets, Part I

Here’s the headline: The intermediate bond index lost almost as much as the S&P 500 index for the quarter (-4.5% vs. -4.6%). A longer bond index with 20+ year average maturity fared worse than any equity index, losing nearly 11% (-10.95). Equity performance for the quarter was misleading, masked by a massive two-week rally that tempered the ugliness up to the March 14 lows. For example, the NASDAQ and Semiconductor indices (SMH) hit bear market lows of -21.5% and -24.6% respectively, eventually rebounding to a more “respectable” quarter end of -8.9% and -12.6%.

It was definitely a value-style driven market for equities, and oil companies, much maligned for over a decade, taking center stage with massive upside performance. Of course, $100+ a barrel for oil was the key driver for that performance. This then kept the Russell 1000 Value practically breakeven at -0.74%, while U.S. small caps (-7.53%) and MSCI international index (-5.47%), followed the rest of the markets down.

It is an understatement to say there is a large amount of uncertainty in both equity and bond markets, and this shows itself daily, with significant volatility and price declines. We expect this uncertainty to persist for at least 3-6 more months. We are looking for the last quarter of the year, however, to take on a more positive market tone, as supply chains improve, monetary clarity from the Fed increases, inflation begins to subside, and the world adjusts to geo-political disruptions.

The same statement that I made in March 2020 regarding the virus response at that time is equally true today: the market will turn up long before the negative news has dissipated. We all know what happened in March-April 2020. The S&P 500 eventually doubled in price while the world continued to deal with challenges from COVID 2.0. The same reasoning applies now, as markets have always historically been forward-looking and begin advancing while news and events remain negative. The old adage “Wall Street climbs a wall of worry” still holds true.

Financial pundits have been making numerous comparisons to various other points in time, like 1970’s stagflation, 2004-2007 Fed rate hikes, or the early 1980’s inflation — and the list goes on. While there may be some similarities to previous history, here’s the thing: our financial markets and economy are nowhere near the same as in previous times. To make my point, let’s play a quick game. What was the largest market cap stock in the S&P 500 in 1980? In 1999? In 2008? Today? The answers in just a minute as we begin to ponder how incredibly efficient, productive, and innovative our economy has become in only the past 15 years, much less 40 years. The answers: In 1980, when I began my investment career, it was General Motors, the undisputed leader in auto manufacturing. Twenty years later another general, General Electric, was the market size leader as Jack Welsh, their CEO, rose to prominence building a massive conglomerate. That fell apart ten years later during the financial meltdown in 2008 and Exxon, with oil prices topping at $140/barrel, became the leader. Ten years later through today, Apple, on the verge of extinction twenty years ago, is now the undisputed giant. Amazon, who industry professionals thought would fold in the early 2000s, remains in the top five, and Facebook founder, Mark Zuckerberg, was about 10 years old at the turn of the century.

The point in all this is to demonstrate how our markets and economy are dynamic, innovative, and ultimately profitable. Long-term investors in U.S. equity markets have reaped the benefit of all this. In the near-term, equity markets will continue to be volatile. Investors will change their minds daily between value and growth stocks. Interest rate increases will continue to weigh on technology and home-related stocks (like Lowes and Home Depot) for the foreseeable future. We view this as a temporary situation within a longer-term investment context.

Financial Markets, Part II

Let’s roll our discussion of the bond market, inflation and interest rates all together, since they are indeed inseparable at this time. At the start of this year, Fed Chairman Powell had already put markets on notice last December that interest rate hikes were on the way and inflation concerns were mounting. The bond market began reacting negatively, in anticipation of what lay ahead. Yields on the 10-year U.S. Treasury note went from 1.52% to 2.32% at quarter end — a startling move (it has advanced further to 2.67% at this writing). The shorter-term two-year note nearly tripled its yield from 0.73% to 2.28% on March 31 (currently 2.51%). As mentioned earlier, long maturity bond indices lost a staggering 11% of principal value in only three months. While investors certainly expect intermittent losses and volatility in the equity markets, downside moves of this magnitude in fixed income have not been seen since 1994, and 1981 prior to that.

The daily angst centers around two issues: will inflation get worse in the months ahead and will the Fed be able to control it without throwing the economy into a recession? The financial markets, for the most part, are answering “yes” to both questions. Case in point, with mortgage rates now at 5%, stocks like Home Depot are down over 27% for the year. Banks, which are supposed to go up in value as rates rise (because they generally increase their earnings in that scenario), are actually declining significantly, due to recession fears. At the end of the day, it comes down to this: you either have confidence in the Fed’s ability to do their job, or not. The markets, for now, say not.

Where does AAFMAA Wealth Management & Trust (AWM&T) stand on all this? No doubt, I could write pages more, but in an effort to provide clarity and simplicity to this morass, I’ll summarize this way:

  1. We do not believe we’ll have a recession. An expected slowdown (deceleration) is not the same as an absolute contraction. Recessions never begin with positive corporate earnings, which is what we have and expect to continue. The labor market is too strong to indicate any recessionary tendencies now.

  2. The Fed will move monetary policy in a steady manner, with an eye on the markets as well as the economy. Although it remains to be seen, we do not believe they will push the economy into recession in the future.

  3. We still embrace our multi-year thesis — that gains in technology promote gains in productivity, which lowers inflation. Technology has been, and continues to be, a wildcard that “protects” us from the traditional results of past economic eras.

  4. The equity markets are struggling this year, as we thought they would. Markets are pricing in a recession, but if the economy (and by extension, corporations) is growing, then eventually that should be reflected in equity prices. We are positioning client portfolios for the next 18 – 24 months (tech and banks, for example), not what markets are chasing today (oil, metals, and food).

  5. We remain very defensive with fixed income holdings, as rates should continue to rise toward 3%. This is actually a more normal level for bonds than the 1% area we experienced the past two years. Ultimately, it leads to a healthier financial environment by reducing inflation, strengthening the dollar, and providing confidence to the markets.

  6. It appears that events in Ukraine will continue for a protracted period of time. Setting aside the horrible human cost and possible political chaos, Europe and the world will adjust to this disruption and begin filling in supply needs. Food and energy prices, however, should remain elevated as long as the war continues. Absent a weather-related harvest, near-term prices have probably peaked on wheat, and energy, as well.


The best course of action for investors? Review your strategic asset allocation and risk tolerance with your Relationship Manager. Make sure it’s in line with your future life needs. Stay the course, be patient, and AWM&T will see you through this interesting period in a disciplined, rational manner.

Disclosure Statement:

Past performance is not a guarantee or a reliable indicator of future results.

AAFMAA Wealth Management & Trust LLC (AWM&T) is a non-depository trust company organized under the laws of North Carolina as a limited liability company. AWM&T is a wholly-owned subsidiary of American Armed Forces Mutual Aid Association (AAFMAA). This material has been prepared exclusively for AAFMAA for informational purposes only and is not intended to provide, and should not be relied on for, accounting, legal, tax, or other advice. All investors should consult their advisers regarding such matters. The investment strategies discussed herein are speculative and involve a high degree of risk, including loss of capital. Investments in any products described herein may be volatile, and investors should have the financial ability and be willing to accept such risks. It should not be assumed, and no representation is made, that past investment performance is reflective of future results. Nothing herein should be deemed to be a prediction or projection of future performance. References, either general or specific, to securities and/or issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Certain current and prior investments may be highlighted in order to provide additional information regarding AWM&T’s investment strategy, the types of investments it pursues, and anticipated exit strategies. The materials contain statements of opinion and belief. Any views expressed herein are those of AWM&T as of the date indicated, are based on information available to AWM&T as of such date, and are subject to change, without notice, based on market and other conditions. No representation is made or assurance given that such views are correct. AWM&T has no duty or obligation to update the information contained herein. Certain information contained herein concerning economic trends and/or data is based on or derived from information provided by independent third-party sources. AWM&T believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.