What a difference a single quarter makes! At this time just three short months ago everything was looking rosy after another strong year in 2021.  In January's market update, we wrote that after two stellar years in the stock markets it was very likely that returns this year would somehow turn out to be on the low side. And so far that is what we are seeing.

There’s no sugar-coating the news: the U.S. and global markets took a hit in the first three months of 2022, offering investors an experience that they haven’t been accustomed to during the long bull market: a bit of red ink on their performance statements. The only bright spot was commodities—but it’s doubtful that anyone with recent experience at the pump is cheering the turmoil in global oil prices.

Just about every investment declined in value in the first quarter. The S&P 500 index of large company stocks was down 4.95%, the NASDAQ Composite declined 9.10%, while small cap stocks were down 7.53%. International stocks dropped 6.61% and Emerging Markets were down 7.32%. Given the unprecedented events going on in Russia, it’s a wonder foreign and emerging markets didn’t do worse.

In the alternatives space, Real Estate Investment Trusts lost 1.25% while commodities, sparked by jumps in oil and gas prices and wheat shortages, posted a 29.05% increase.

In the bond markets, yields have leapt higher on the short end, even though the Fed has only increased short-term rates by 0.25% so far this year. The bond market appears spooked by the Fed’s plans to reverse their bond buying program and raise rates a total of six times and by as much as 0.5% per rate hike. As a result, bond prices have declined even more than stocks have so far this year. It’s been many a moon since bonds have lost 5%, but the flip side is we should soon be seeing higher yields in our fixed income investments in the months ahead as those higher yields work their way into the bonds that are in your bond funds.

These market declines are always a bit nerve-rattling, of course. While most economists still predict economic growth this year, nobody knows for sure just what the impact to the economy will be of higher interest rates, the situation in Ukraine, higher fuel prices and related inflationary pressures, plus new fears of supply chain disruptions brought on by the new Chinese COVID-19 lockdowns that are just getting started. If you haven’t seen videos of the people in Shanghai wailing from their apartments, it is quite disturbing.

More optimistically, we can’t ignore the fact that the U.S. economy added 431,000 new jobs in March, after a gain of 678,000 in February. Oil prices are once again below $100 a barrel despite all the dire predictions of global shortages, and U.S.-based corporations experienced their most profitable year since 1950 in calendar 2021. People who see the glass half-empty certainly have some data on their side, but so too do the optimists among us—and what’s interesting is that this has always been true.

If the markets continue their choppy course, you will see a lot of pundits, soothsayers and (even less reliable) market economists telling us with confidence what’s going to happen next. Some of them, by the law of averages, will be right, and will trade on that credibility through several false predictions to come. It’s like the story of the huckster who would go to the race track and tell different people which horse was going to win the next race—and this clever person would give different people the names of different horses.

Inevitably, one of the horses would win, at which point the clever tout (avoiding the people to whom he gave incorrect predictions) would approach the happy winners and offer to sell his next surefire winning prediction. The only difference is that market economists are better at this game.

And so we wait, perhaps impatiently, for the next time the markets test new highs. Even if we don’t know when that will happen, history offers encouraging evidence that it will, and all the anxiety and excitement that the markets produce in the meantime will have been, depending on your temperament, wasted energy or pure entertainment.

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