The first quarter this year has so far been marred by war, oil price shocks, inflation, and rising interest rates. As it stands now, the Dow and S&P 500 indices have each fallen about 4% this year, while the tech-heavy Nasdaq index has fallen 8%. Yet, the markets have rallied strongly off their bottoms. The Dow is up about 8% from its low, and the S&P 500 and Nasdaq are up 15% and 16% from their lows, respectively. It goes to show that trying to time the market can be very difficult. In the age of fast internet access and the ability of traders to trade from anywhere, market moves are happening quicker than ever. Just as everything seemed to be at its worst in terms of geopolitics and economics markets started rapidly recovering.
War and surplus cash have pushed oil and other commodity prices soaring over the past three months. This has compelled the White House to announce that the US would be tapping its “strategic reserves” of oil in order to add supply to the market and help ease the upward pressure on price. The reaction of the oil markets were swift and crude prices immediately fell by nearly 10%. Still, year-to-date oil prices are up over 35% and we are all feeling it at the pump. Further price declines from here along with easing of tensions in Eastern Europe should help moderate inflation somewhat as commodities (and goods made from those commodities) flow more smoothly.
Unfortunately, inflation remains a concern for both consumers and the Federal Reserve, who is mandated to maintain price stability and full employment. As of now, the markets are pricing in 8 interest rate increases in 2022. That would mean the Fed would be increasing rates every month on average. Anyone who has recently looked to buy a home or refinance has seen rates jump considerably since last year. However, this is not all doom and gloom. Rates are still very low by historical standards and any deviation away from aggressive rate increases will be greatly cheered on by the equity markets.
As we head into Q2 we anticipate less volatility than we saw this past three months and still maintain a strong bias to equities versus fixed income.