Russia’s invasion of Ukraine, continued supply-chain issues, accelerating inflation, the Federal Reserve’s interest rate hikes, China’s continued Covid lock-down, and inversion of the yield curve put into context negative quarter one returns in equity and bonds. Long-term implications may include more military spending, acceleration of green energy, shifts from global to regional economies, greater unity among the European Union and NATO, countries taking sides (or forced to), and impact on US and China interactions. Officially, stocks and bonds entered a correction. ¹The quarter ended with negative returns: S&P 500 -4.6%, NASDAQ -8.9%, and ten-year treasuries -5.5%. International markets were down as well with the Nikkei -2.6%, Stoxx Europe 600 -5.9% and the Dax -9.3%. In contrast, energy finished 41.3%, agriculture 25% and industrial metals 21.5%. The labor market is tight with employers adding 431,000 jobs in March. Airline fares are up 10.7% in March from February.


²Notably, the two-year treasury yield outpaced the ten-year treasury yield, and the five-year treasury yield outpaced the 30-year treasury yield. Not all inverted yield curves lead to recession but often it can signal an upcoming recession. The Federal Reserve owns about $9TN in bonds which is 25% of the Treasury Market. Historically, quantitative tightening in 2017 resulted in volatile equity returns and bond yields plummeting.

Inflation & Federal Reserve

³Inflation is the highest it has been in 40 years having accelerated to 8.5% in March which is a four-decade high. This marks six straight months of inflation above 6% and is above the Federal Reserves’ 2% target. Meat is 13.7% more expensive than it was last March, cereal and bakery products up 9.4%, and fruits and vegetables up 8.5% according to the U.S. Bureau of Labor Statistics. Some increase in pricing is because of the Russia-Ukraine war as the countries are big producers of wheat, maize, and fertilizer. The Organization for Economic Cooperation and Development estimates that global economic growth may be about 1% lower and inflation almost 2.5% higher than if Russia’s invasion of Ukraine had not occurred. The Federal Reserve’s top priority is to reduce inflation while still tightening monetary policy. It is considering raising rates by a half of a percent instead of a quarter point in May given strong job growth and inflation numbers.

Source: BLS, FactSet, J.P. Morgan Asset Management. Guide to the Markets – U.S. Data are as of March 31, 2022

Russia’s invasion of Ukraine is a grave, profound, and unthinkable humanitarian crisis with about 4.9MM refugees having fled Ukraine since February 2022 and about 13MM stranded or unable to leave according to the UN Refugee Agency. The depth of economic hardship in energy, commodities, trade, and supply chain reverberates worldwide. Russia and Ukraine are key players in energy, agriculture, and metals. The European Commission recently announced plans to eliminate dependence on Russian natural gas and crude oil this decade. ³The European Union currently imports 40% of its natural gas from Russia. Russia supplies about 19% of the world’s natural gas, 11% of oil. Green energy acceleration will not be easy given dependence on scarce metals and materials. More than 35% of the world’s palladium is in Russia, and Ukraine has abundant lithium reserves. Fuel cells for hydrogen-powered vehicles use palladium and electric vehicle batteries use lithium.

Source: FactSet, J.P. Morgan Asset Management; (Left) Bloomberg, CME; (Right) EuroStat, HSBC. Guide to the Markets – U.S. Data are as of March 31, 2022.

China’s gross domestic product grew 4.8% in the first quarter of 2022 with most growth occurring in January and February. However, the world’s second largest economy slowed in March because of Beijing’s efforts to curb Covid outbreak and businesses being forced to suspend operations. About a quarter of the country’s population (40% of its economy) are subject to lockdown. Beijing’s 5.5% GDP growth target may be out of reach. China responded with interest rate cuts in effort to boost the economy and spur lending.


Many analysts continue to favor equity over bonds and cash for 2022 assuming the U.S. does not fall into recession but caution that the market may remain volatile with significant uncertainty. The White House announced a record release of one million barrels per day of oil for the next six months to address oil and gas prices. The U.S. labor market is very strong, unemployment is decreasing, and baby boomers are exiting the workforce.  Inflation is likely to remain moderate. Forecasts of 3% of less for real GDP on a year-over-year basis by fourth quarter remain.

It is important to keep in mind that financial markets are forward-looking, while economic data tends to be retrospective.  More balanced diversification across the market sectors is our basis for a prudent long-term investing approach.


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All data presented as of March 2022