War, inflation and the lingering impact of a global disease made the first quarter a historically rough one for stock and bond investors.
Across equity and fixed-income markets broadly, the least-bad performance among U.S. assets were declines of 4.9% in the S&P 500 and speculative credit. They were followed by a 5.6% fall in Treasuries and a 7.8% slide in investment grade. Not since 1980 has the best return among those four categories been so paltry, data compiled by Bloomberg show.
Numerous periods have obviously been far worse for specific sectors. This quarter’s retreat in equities pales in comparison to the 20% drubbing they took at the start of 2020. But viewed as a whole -- and leaving out commodities, which soared -- the new year has been a futile one for an investor seeking shelter from the global storm.
Things “really came together in a cocktail of bad timing between the high inflation, the Fed looking to tighten monetary policy in a hawkish manner,” said Fiona Cincotta, senior market analyst at City Index, by phone. “And throw into that the uncertainty for Putin’s war and what that means for energy and oil prices, which still need to ripple out in the economy, there is definitely more bad news to come.”
More than $3 trillion was erased from bond and equity values in the first quarter as the Federal Reserve raised interest rates for the first time since 2018. With traders quickly adjusting to a more hawkish central bank, parts of Treasury yield curves inverted, with long-dated rates falling below short-dated ones -- a development that many investors view as flashing warnings that the economy may head into a recession.
Stocks also got off to a rough start. The S&P 500 suffered a peak-to-trough slide of 13% at its worst, while the tech-heavy Nasdaq 100 and the Russell 2000 of small-caps each entered a bear-market decline of 20%. Thanks in part to growing optimism that stocks may serve as a hedge against inflation, the market bounced back in the last two weeks and generally outperformed bonds, based on data through March 30.
The dire performance was a new experience for the majority of investors who park their money in stocks and bonds. The concerted selloff is particularly bad news for the popular 60/40 portfolio strategy that aims to perform well through the benefit of diversification and is widely followed by balanced mutual funds and pensions.
A Bloomberg model tracking a portfolio of 60% stocks and 40% fixed-income securities dropped 4.6% as of Wednesday, all but certain to notch the first quarterly loss in two years.
“No one’s happy, right?” Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management, said by phone. “Interestingly, from a relative perspective, you’ve been even happier owning stocks than bonds, and I think it means you need to complement those with real assets.”
The only major asset that’s booming is commodities. From oil to copper to wheat, the prices of basic materials have surged as a supply crunch was exacerbated by Russia’s invasion of Ukraine. The Bloomberg Commodity Index jumped 25% for the best quarter since 1990.