The Legacy Perspective – April 2022
by Steve Wachs, CFP®
The paragraph below is a first quarter update that we recently received from JP Morgan. It does a good job of providing facts about recent returns in different asset classes and sectors. If you find it difficult to get through it, go ahead and jump to the next paragraph and I will translate their message.
Asset class returns in 1Q22 were impacted by heightened geopolitical tensions, tighter monetary policy and a divergence in COVID-19 policies across regions. In terms of performance, commodities led the way with a 1Q22 return of 25.5%, as import bans on Russian oil along with only a gradual improvement in supply chains have boosted energy, food and raw materials prices. Equities, overall, had a difficult quarter due to higher rates challenging valuations and fears that inflation may put a dent on consumer spending and earnings. Within equities, large caps finished the first quarter down 4.6%, while their small cap peers ended the period down 7.5%. Similarly, higher interest rates have begun to cool a hot real estate market, with REITs declining 5.3% in 1Q22. However, at the industry level, we did see positive performances among lodging/resorts (+6.9%) and offices (+2.8%), as they continue to benefit from the cyclical rebound and easing of economic restrictions. Moving to international markets, DM (Developed Market) equity and EM (Emerging Market) equity decreased 5.8% and 6.9%, respectively, in 1Q22. The conflict in Ukraine weighed heavily on European markets, with the region’s growth estimates cut significantly in the wake of the Russian invasion in Ukraine. Additionally, emerging markets, particularly China, have suffered, as governments continued to impose COVID-19 lockdowns. Turning to bonds, U.S. fixed income markets declined 5.9% over the first three months of 2022, as the Federal Reserve moved forward with hiking interest rates and markets anticipating further tightening through year-end. Lastly, global high yield decreased 5.7% due to the flight to quality stemming from the Russia-Ukraine conflict and continued downgrades and defaults in the Chinese property sector. JPMorgan Weekly Market Recap – 4/4/22
To summarize what all these words say, most every investment class had negative returns for this past quarter. In fact, fixed income (bond) returns declined more than equity (stock) returns which rarely happens. What these facts don’t convey is the emotions created when the value of your portfolio is less than it was at end of the year.
During these uncertain times, we remind you that it is important to not let your emotions dictate investment action. We remind you that your planned income distributions are protected from any downturn. We remind you that part of your portfolio is allocated to alternative investments that held up better than stocks or bonds. We remind you that your portfolio has generated above average returns over the past three years. The bottom line – facts are important – but a perspective regarding these facts is more important.
The above graph is sent to us by investment groups anytime a global conflict arises. I have not shared it with clients in the past and will explain why. What the graph illustrates is the growth of $10,000 invested in the U.S. stock market over the past 80 years despite the many wars and terrorist events during that time. $10,000 growing to $3,815,999 at end of 2021 is factually true. That assumes an investor did not let the fear during events like the Cuban Missile Crisis (I remember “duck and cover” at a young age and knew even then it would not provide much protection from a nuclear bomb) or the decimating attack on 9/11 to cause one to exit the stock market. Historically, geo-political events while tragic, do not impact the growth of U.S. companies as much as would be expected. Why I have not used this graph is the red dots. Each of those dots depicted on the graph reflects the loss of lives. Standing at the site where the Arizona was during the attack on Pearl Harbor or solemnly observing the 9/11 memorial, the terror of these events become real. Many of you have served in the military as my father did during the Korean War and have witnessed the tragedy of war. What we are witnessing in Ukraine right now is a vivid reminder and means more than a red dot.
We will continue to be a buffer from letting your emotions dictate actions as we offer our perspective and ideas through these uncertain times and others that will surely follow. Know that these emotions are real and we feel them. As Memorial Day approaches, we will feel the sadness and gratitude for the loss and service of so many over the last 80 years.
- Legacy Consulting Group is registered as an investment adviser with the SEC and only conducts business in states where it is properly registered or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability.
- Information presented is believed to be current. It should not be viewed as personalized investment advice. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. You should consult with a professional advisor before implementing any strategies discussed.
- All investments and strategies have the potential for profit or loss. Different types of investments involve higher and lower levels of risk. There is no guarantee that a specific investment or strategy will be suitable or profitable for an investor’s portfolio. There are no assurances that an investor’s portfolio will match or exceed any particular benchmark.