April 2022

Review: First Quarter 2022

Correlation of Markets

One of the reasons we diversify by asset class is the desire to have assets that are not correlated with each other. When an asset is correlated it tends to follow the movement of the asset to which it is correlated. In the case of non-correlated assets, they tend to move randomly from the asset with which they are being compared. For this reason, we use stocks and bonds. These two broad asset classes tend not to be correlated. As with all good stories there is an exception to every rule!

Stocks, Bonds and Correlation

When two asset classes are not correlated it does not mean that they can’t both move in the same direction. Unfortunately, this was a case in point during the first quarter of 2022. Inflation, the FED raising interest rates, increasing commodity preces, the war in Ukraine and supply chain issues negatively impacted both stocks and bonds during the first quarter. Using the S&P 500 as our measure of stocks, it fell 4.9% during the first quarter. Using the Bloomberg Aggregate Bond Index as our measure for bonds, it fell by 6% in the first quarter. For bonds, this was the worst decline in over 40 years.

What do you do?

Going into the quarter, on the accounts where I have discretion, I reduced the duration of the bonds, the time till maturity. Shorter-term bonds are not impacted as badly as long-term bonds in a rising inflation period. While they were not as exposed, we still suffered losses. I also increased our exposure to value stocks, which helped but we still had exposure to growth stocks which didn’t fair well. To put all into perspective: had you created a balanced portfolio of 50% stocks and 50% bonds, using the measures noted before, an investor would have had a loss of 5.45%. There was a bright spot, and that was commodities, which went up. Unfortunately, your biggest commodity investment is at the gas pump, where the prices have skyrocketed.


There are times, as I see events unfolding, that can call for adjustments in long-term portfolio design. It’s clear that the war in Ukraine is having a devastating impact on that country. As the western nations have vowed to help, much of that help will have an impact on the nations posing sanctions. Growth prospects for the world since the beginning of the fighting have gone down. Countries like Germany, who are reliant on Russian gas and oil, will see a fall in industrial production. The value of the Euro has gone down. The value of foreign investments has gone down. It seems likely that Europe could see a recession this year. They too have a serious inflation problem. I believe this impact, with the slowdown of world economies, will have a negative impact on emerging countries over the next couple of years. For this reason, I don’t see foreign investments as a worthwhile segment for investments.

U.S. Economy

While the U.S. is impacted by the above, I believe that with full employment, coupled with consumer and industry spending, the U.S. will not have a recession and the second half of 2022 will look better than the first half. There is one caveat and that is: all will depend on how the FED manages increasing interest rates. The worry in the markets at this time is that if the FED is too aggressive in raising rates they may kill the jobs market, consumer spending and thereby the economy. We will have to see how this plays out over the coming months.

Numbers Review

The S&P 500 index ended the quarter at 4530 compared with 4766 at year end, down 4.9%. The S&P Mid Cap index ended the quarter at 2694, down from 2842 at year end, or -5.2%. The S&P Small Cap index ended at 1319 compared with 1384 at year end, down 5.9%. The MSCI ex USA index for foreign stocks declined to 324 from 344, for a loss of 6%. The 10-year Treasury was 2.55% down substantially from 1.496% at year end. As noted earlier, the Bloomberg Barclays US Aggregate Bond Index yield went from 1.75%, at year end, to 2.92%, for a decline of 6% for the quarter.


Currently, we are facing head winds as investors. We’ve lived through these before, but they are never pleasant. In the near term I see a need to maintain short bond durations and emphasize value over growth in our stock positions. In some portfolio’s we’ve reintroduced real estate as an alternative investment.

The market has already priced FED increases of 2.75% in the bond market. While this resulted in an awfully bad first quarter, it could mean most of the negative impact to bonds is already priced into the market. Stocks should continue to be volatile as Ukraine, inflation and the FED are unsettling. This should work its way out over the coming months.

Ed Mallon