Quite often, people and investment managers select what they think are superior investments via seemingly well thought out analysis of the particular companies of interest and the macroeconomic conditions that affect them. “Obvious” picks seem to be readily apparent. The problem with this predictive approach, in my opinion, is that it is often the unknown and unforeseeable events around the world that most affect a particular company’s prospects. More relevant for investors, it’s even harder to predict how the market will react to the future value of a particular stock as information is processed minute by minute each day.
Probably the most significant recent unforeseeable global event was the Russian invasion on Ukraine. Perhaps some saw it coming but I’m sure few would have been able to predict specifically how the war has played out along with the genesis of political and regulatory responses. And, we are still in the early days and a lot can happen.
These mostly unforeseen events have increased the focus on potential stagflation in the media, so what is stagflation? Simply put, stagflation can occur when economic growth slows, inflation increases, and unemployment increases.
I thought it might be helpful to look at how some asset classes performed during a stagflation period in the past. Even though we all know and understand that past performance is no guarantee of future results, looking at historical data can provide some perspective. Economists have shown that stagflation was prevalent among seven major market economies from 1973 to 1982. Currently, it’s debatable whether or not we are seeing all of the conditions of stagflation due to relatively strong employment numbers but time will tell. Having said all this, we’ll look at several asset classes and how they performed from 1973 to 1982.
2022 Q1 Index Review Through March 31
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net dividends]), Emerging Markets (MSCI Emerging Markets Index [net dividends]), Global Real Estate (S&P Global REIT Index [net dividends]), US Bond Market (Bloomberg US Aggregate Bond Index), and Global Bond Market ex US (Bloomberg Global Aggregate ex-USD Bond Index [hedged to USD]). S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2022, all rights reserved. Bloomberg data provided by Bloomberg.
The first quarter of 2022 was definitely a reset for all asset selected classes from equites through bonds. Emerging markets saw the greatest downturn for equities at 6.97% and the downturn in the U.S. bond market exceeded that of the U.S. stock market and international developed stocks.
Given the rough quarter, 1 year numbers for most equities still showed positive growth with all asset classes showing growth for both 5 and 10 year periods.
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