The Masters, golf’s annual first major of the year, is upon us. I love watching the tranquility of the Masters. Augusta National is absolutely gorgeous, perfectly manicured and pristine. While watching on CBS, you feel this calmness with the birds chirping and Jim Nantz’s soft, almost whisper-like voice that could put you to sleep. To think that across the world in Ukraine something totally opposite of that peacefulness is going on is distressing. Besides the devastating toll and suffering on human life, it has caused chaos in the financial markets which can be seen in the 1Q22 results. Pretty much all traditional markets were down. The only saving grace was alternatives, led by commodities. Add inflation at its highest rate in about four decades and a Fed scrambling to get that under control by raising rates and it’s not surprising to see the markets down. Anxiety is running high for many but we’re here to tell you that it’s not all negative. Might not be as beautiful as the Azaleas at Augusta, but there are some positives. But before we get into that, let’s see how the asset classes fared in 1Q22.
Equities: Like a duck hook into the water. Benchmarks in equity land were down anywhere from about 4.6% (S&P500) to down 7.5% (Russell 2000 Small Cap). As you can see in the style box below, growth and smaller cap really got hit while value hung in there. That actually can be seen as a healthy sign as it signals that valuation matters again, i.e. those stocks with the higher (and in some cases ridiculously higher) multiples were sold and got hit the hardest. In the domestic vs overseas watch, overseas slightly underperformed as evidenced by the MSCI AC World Index Ex-USA down 5.4% and MSCI Emerging Markets -7.0%.
Fixed Income: Like a shank out of bounds. US bonds suffered their worst quarter in over 40 years, evidenced by the Barclays US Aggregate Bond Index down 5.9%. What used to be seen as a safe haven for retirees and others looking for stable albeit lower returns, this asset class has been turned upside down by tightening monetary policy as evidenced by the Fed’s first interest rate increase since 2018. Negative returns can and will happen when rates move up quickly, evidenced by the 10-yr Treasury Note yield moving up from its 12/31/21 close of 1.5% to its 3/31/22 close of 2.3% and at time of this writing 2.7%! The headwinds for this asset class will continue as the Fed has become more hawkish and has signaled more and possibly bigger rate hikes and plans to reduce its $9 Trillion balance sheet.
Alternatives: Safely onto the fairway. Alternatives served as a great diversifier in 1Q. According to Calamos, “six alts categories closed the quarter in the green with an additional four categories barely 1% down.” Leading the way were commodities, up 22.7%*, its best quarter since the ‘90s. Not surprising as commodities prices typically rise when inflation is accelerating. The Russia/Ukraine conflict only supercharged the rally already underway. In particular, oil has surged with price of crude jumping from $76 to over $100 by quarter end. We’ve all seen it at the pump. Another area within alts slowed down: Real Estate which was in hotter in demand than a pimento cheese sandwich at Augusta this week lost 3.2%** in 1Q. Why? Mortgage rates generally move in-line with the 10-yr and as such, the national average mortgage rate just topped 5%, the highest point in more than a decade. For the record, the Morningstar Diversified Alternatives Index was about flat, -0.3%.
Kinda like Justin Thomas in Round 1 yesterday, 2022 was a rough start for most investors. Those that have a diversified allocation to alternatives fared somewhat better than those just holding the traditional equity and bond allocation.
So are we stuck in Amen Corner*** forever? No, despite all the headwinds, there are positives out there:
- Here in the US, we can withstand an oil shock as US consumers only spend 4.3% on energy and US is no longer a net importer of oil.
- With Omicron in the rear view mirror and people learning to live with the pandemic, growth looks to pick up strongly throughout rest of this year.
- Businesses and consumers have very healthy balance sheets.
- Companies are hungry. There is massive demand for workers shown by unemployment just clicking in at 3.6% - there’s only been 5 months since 1969 when it has been lower
- Consumers, despite griping about inflation, continue to spend on goods and services.
- Earnings expectations have continued to rise because the economy is in very good shape
- A pullback / correction like the one we just had might actually be a very healthy thing because it may signify that the underlying assets’ valuation are getting back in line with fundamentals. Read more on this here.
In conclusion, it is only natural to feel anxious at a time like this given the geopolitics and other noise. Don’t let emotions creep into investing. Working with a trusted advisor can soothe those anxieties in a Jim Nantz way by developing a diversified portfolio in-line with your long-term financial plan. “A tradition unlike any other.”
Brett M. Detterbeck, CFA, CFP®
DETTERBECK WEALTH MANAGEMENT
* represented by the Eaton Vance Parametric Structured Commodity Fund
** represented by the Easterly Global Real Estate Fund
***Amen Corner is one of the most recognizable and challenging stretches in golf and can make or break or round at the Masters