April 2022 Monthly Market Review

Risk aversion spiked in April despite a lack of meaningful change in variables including geopolitical events, inflation, and hawkish central banks.  Russia’s offensive against Ukraine raged on, and in spite of heavy sanctions, the former continued to avoid a debt default.

During the month, Russia halted gas exports to Poland and Bulgaria—perhaps in an opening salvo of retaliation against sanctions.  Concerns regarding China reverberated throughout the markets, particularly in regard to China’s support of Russia, an uptick in unification rhetoric regarding Taiwan, and the potential effects of China’s “zero-COVID” policy on supply chains.

In addition to these issues, inflation remained elevated across the globe, and central banks grew more hawkish—especially the Federal Reserve, which telegraphed comfort in the potential for multiple rate hikes of 50 bps each.  Risk assets sold off meaningfully. U.S. equities, led by a sharp decline in technology companies, fell 9% and underperformed international developed and emerging markets equities.  There were few places to hide in this environment.  Rising yields and a yield curve inversion in early April pressured fixed income markets.  The only areas of positive performance were the U.S. dollar, energy commodities, and agriculture commodities.

After a March rebound, domestic equities sold off in April.  The S&P 500 Index fell 8.7%, bringing year-to-date performance as of April 30th to a 12.9% loss and marking the worst start to a calendar year since the 1930s.  The broader Russell 3000 Index shed 9.0% in April and 13.8% year-to-date.  Investors were shaken by fears of inflation and higher interest rates.  Growth stocks, which have longer duration and tend to be more affected by rate increases, lagged their value counterparts; the Russell 3000 Growth Index sold off 12.1% versus 5.8% for the Russell 3000 Value Index.  This underperformance widened the year-to-date gap between the two styles to almost 1,400 bps.  In a risk-off market environment, large caps bested small caps, with the Russell 1000 Index retreating 8.9% versus 9.9% for the Russell 2000 Index.

Ten of 11 GICS sectors posted drawdowns, with consumer staples (+2.2%) the lone gainer.  Other defensive sectors, such as real estate
(-4.2%) and utilities (-4.2%), delivered negative returns but outperformed the S&P 500.  Similarly, energy (-1.6%) and materials (-4.4%), both of which are viewed as inflation hedges, were negative in April but led the broad market.

Of the sectors that lagged the broad market, the  most notable losses were in communication services (-15.8%), consumer discretionary
(-12.2%), and IT (-11.7%).  Across these sectors, the most aggressive growth holdings struggled through the month.  After a number of weak earnings reports from FAANGM stocks, performance declines accelerated as April came to a close. Among the FAANGM stocks, Apple
(-9.7%) and Microsoft (-10.0%) – two of the largest index constituents – declined roughly in line with the broad market – while others such as Amazon (-23.7%), Alphabet (-17.7%), and Netflix (-49.2%) were notable laggards.  Netflix has a small index weight of 25 bps but after reporting a decline in subscribers for the first time in 10 years, its outsized loss caused it to be a significant drag on the benchmark.  Lastly, Meta Platforms (-9.8%) plummeted in early April before rebounding on what the market perceived as favorable results as the month came to a close.  Outside of the FAANGMs, NVIDIA (-32.0%) and Tesla (-19.2%) were meaningful detractors as well.

There was considerable dispersion within technology.  Managers that invest in “innovation”-focused companies – those that are considered to be disruptors but are  often years away from turning a profit,  struggled mightily.  Goldman Sachs tracks a basket of these innovative, non-profitable  companies in the tech space which are commonly held by growth-oriented and tech-focused hedge funds.  This basket has been among the hardest hit areas of the market year-to-date, falling 41.9%, or nearly 2x the loss of the tech-focused NASDAQ QQQ ETF.  Much of this pain was felt in April after a brief “buy the dip” rally in late March lost steam as companies reported disappointing earnings.  While painful for some long investors, the collapse of this market niche has been a boon to value-oriented short sellers.

Outside the U.S., equity markets generally held up better despite the continued strength on the U.S. dollar.  The MSCI EAFE Index fell just 1.4% in local terms; however, losses were more severe after accounting for currency movements, as the benchmark declined 6.5% in USD terms.

Relative strength of developed non-U.S., markets was driven by positive performance from foreign, globally diversified energy, healthcare, and consumer staples names, including GlaxoSmithKline (+4.0%), Novo Nordisk (+2.8%), Danone (+9.2%), and Repsol (+13.6%).

The USD has surged year-to-date, reaching its highest level in two decades in April as measured by the Dollar Spot Index.  Strength of the greenback has been driven primarily by expectations of widening interest rate differentials between the U.S. and the rest of the world.  The Fed is embarking on an aggressive tightening campaign.  Market participants expect that the pace of tightening in Europe will lag well behind that of the U.S.  Additionally,  the Bank of Japan is moving in another direction altogether by maintaining ultra-loose monetary policy.  As a result of monetary policy differences, the Japanese yen fell 6.3% versus the USD and hit a 20-year low during the month.  The euro (-5.2%), British pound (-4.6%), Swedish krona (-4.8%), Aussie dollar (-5.4%), and Swiss franc (-5.2%) suffered similar weakness relative to the dollar.

Despite continued macro-headwinds, emerging markets equities (-5.6%) outperformed developed markets counterparts in the month.  Sentiment in China (-4.1% USD) remained fragile and weighed on broad market returns as the country’s “zero COVID” policy continued to cause a slowdown in the economy and threaten its 5.5% annual growth target.  After a five-week (and counting) lockdown in Shanghai, markets feared rising cases in Beijing could potentially lead to similar containment measures and cause China to undershoot its 5.5% annual growth target.  This caused a sharp sell-off across China’s equity market.  The CSI 300 Index, which measures the performance of the top 300 large cap and mid cap stocks listed in Shanghai and Shenzhen, fell 8.4% USD.  This represented its largest monthly decline in six years.  A deteriorating economic outlook and rising U.S. debt yields also led to a sharp fall in the Renminbi, which fell 3.7% against the U.S. dollar.  This represents its biggest monthly drop on record.  Elsewhere in emerging markets, Taiwan (-9.8% USD) pulled back on rising COVID cases and market fears of a slowdown in demand following a multi-year, pandemic-driven boom.

In March 2022, the Federal Open Markets Committee (FOMC) raised rates by 25 bps, its first rate hike in more than three years.  During April, the minutes from the March FOMC meeting were released and markets were surprised that the minutes revealed that a number of FOMC members supported a larger rate hike of 50 bps.  Had Russia not invaded Ukraine in February, the FOMC would have instituted a larger rate hike.  Various Fed members made comments throughout April to prepare markets for potential 50 bps hikes at the May, June, and July  meetings in an effort to tame inflation.  Additionally, the Fed guided for a start in the balance sheet normalization process—by not re-investing proceeds from maturities—to begin in June.  After a short phase-in period, the Fed indicated that it will allow $60 billion in Treasuries and $35 billion in mortgage-backed securities to mature each month.

As a result of a sharp shift in monetary policy, yields rose across the term structure.  The yield curve briefly inverted at the beginning of April before returning to positive territory.

Historically, a flat yield curve indicates the market is concerned about future growth, while an inverted yield curve has been a fairly reliable predictor of a future recession.  As rates rose, Treasuries sold off, falling 8.9% at the long-end and declining 3.2% in the intermediate portion. Spread sectors were under pressure as rates rose and spreads widened, leading to retreats of 5.5% in investment-grade corporates, 9.8% in long-dated investment-grade corporates, and 3.6% in high-yield.

The Bloomberg U.S. Aggregate Index, a widely used proxy for the broad bond market, fell 3.8% in April.  The monthly decline was outsized.  That said, data from eVestment indicates that the drawdown from July 2020 through April 2022 was the largest in the benchmark’s history.

Within real assets, commodities (+4.1%) was the only segment to post positive returns during the month.  In particular, energy (+13.5%) and agricultural (+5.7%) commodities continued rising.  According to the U.S. Energy Information Administration, Russia produced 10.1 million barrels/day (mbpd) of crude oil and condensate (mostly natural gas liquids) and exported roughly 4.7 mbpd in 2021.  Additionally, a Washington Post column detailed how important Russia and Ukraine are for food and fertilizer exports.  As the war continued and sanctions remained in place, food and energy prices pushed the CPI higher on fear of supply disruptions as near-term global demand grew.

Other inflation-protected assets declined, however.  Energy equities
(-1.5%) and natural resource equities (-3.2%) were positive for most of the month but moved into negative territory on the final trading day of the month as U.S., global, and Chinese growth concerns darkened the outlook for demand.  Energy companies reported strong year over year Q1 2022 earnings growth on higher commodities prices.  Exxon delivered a $5.4 billion profit despite a $3.4 billion write-down on its Russian operations.  Companies in the sector were generating large sums of free cash flow, which was being allocated to dividend payout increases, share buybacks, investments in energy transition businesses, and capital and exploration investment.

Real estate stocks (-4.5%) also retreated on the final trading day of the month along with the broader market.  Office (10.5%) and self-storage
(-6.1%) led the decline, while hotels (+2.0%) continued their year to date advance (+9.0%) on continued growth in leisure travel and a nascent recovery in business and group travel.  While higher interest rates can potentially increase borrowing costs and asset capitalization rates, historically, real estate has performed well in inflationary environments and rate hiking cycles.  The asset class historically has been able to pass through higher costs via rent adjustments and has benefited from higher replacement costs (higher input and construction costs).

Indices referenced are unmanaged and cannot be invested in directly.  Index returns do not reflect any investment management fees or transaction expenses. This report is intended for informational purposes only; it does not constitute an offer, nor does it invite anyone to make an offer to buy or sell securities.  Information herein has been obtained from third-party sources that are believed to be reliable; however, the accuracy of the data is not guaranteed and may not have been independently verified. The content of this report is current as of the date indicated and is subject to change without notice.  It does not take into account the specific investment objectives, financial situations, or needs of individual or institutional investors.   All commentary contained within is the opinion of Prime Buchholz and intended solely for our clients. Unless otherwise noted, FactSet was the source for data used in this report. Some statements in this report that are not historical facts are forward-looking statements based on current expectations of future events and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Past performance is not an indication of future results.