Not All Quarters Can Be Positive
The streak is over. After seven consecutive quarters of positive returns, the first quarter of 2022 gave us a return of -5.0% for the Standard & Poor’s 500 Index. Underperformance was broad based, as every sector but energy and utilities was down for the quarter. The communications services sector led underperformance, down 12% in the quarter. Energy, the best performing sector, was up 39%. A sharp increase in the price of oil in the first quarter was the biggest contributor to its strong performance. The spread between the best and worst performing sectors was 50 percentage points, which is very significant.
Decreasing confidence in the ability of companies to sustain the growth they have seen from 2020 to present was also a contributor to negative returns.
Value outperformed growth with the MSCI USA Value Index return of -2.0% and MSCI USA Growth Index at -9.1%. Over the prior 40 quarters, the growth index had outperformed the value index close to 70% of the time.
Size was a positive indicator of performance as bigger companies performed better than smaller companies. The MSCI USA Large Cap Index was down 5.5%. The Mid Cap Index was at -6.1%. The worst-performing segment based on size was small cap, down 6.2%.
U.S. markets fared better than international markets. The MSCI All Country World ex USA Index was down 5.3% over the period. Russia was one of the largest underperformers, with the Russia RTS Index down 35.23% in the quarter. The Index reopened on March 24 after a February 25 closure at the beginning of the Russia-Ukraine conflict. The opening was limited to 33 stocks. Transactions have been limited to domestic trading. Foreigners continue to be prevented from selling their shares. And no short selling is allowed.
China’s equity markets also continued to be weak this quarter. The Shanghai Composite and Shenzhen SE Composite were down 10.2% and 16.0% respectively. The underperformance in Chinese markets comes as the government fights a new surge of COVID cases. Lockdowns in Shanghai and other cities have impacted production negatively.
Major European countries have been rocked by sharp increases in energy costs and supply concerns. For example, 40% of the natural gas consumed in the European Union is supplied by Russia. The MSCI Europe Index was down 7.9% in the quarter. Germany, the largest consumer of Russian gas, has seen its equity markets face some price pressures as evidenced by the quarterly return for the DAX Index which was down 8.6%.
Looking Ahead
2022 is already proving to be a much different year from 2021. We do not expect equity markets to see the same kinds of returns as in 2021. Changes in monetary policy executed by the Federal Reserve (Fed) is expected to contribute to more muted growth. Fed action comes as they seek to bring inflation down to their 2% target. Companies are unlikely to pass on the full impact of price increases to customers. This will likely contribute to some margin compression. Increasing labor costs also have the potential to erode margins. Extended supply chain issues will continue to have a negative impact on earnings. However, despite the obstacles, growth is expected with earnings expected to rise 9.4% through 2022. Sales are expected to be up 8.8%, and growth in earnings and sales are expected to impact market performance positively.
Source: BTC Capital Management, Bloomberg LP, Ibbotson Associates, FactSet, Refinitiv.
The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.
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