QUARTERLY INSIGHT

The steep declines in the tech sector exacerbated market volatility in January. Additionally, while the fourth-quarter earnings season was solid, there were several large, widely held technology companies that posted disappointing results or forecasts, and that also contributed to general market volatility. Finally, in late January at the FOMC meeting, Fed Chair Powell clearly signaled that the Fed would be raising rates at the next meeting (in March) confirming to investors that interest rates were going to rise much more quickly than had been assumed just a few months prior. The S&P 500 ended January with the worst monthly return since March 2020 (the onset of the pandemic).

Volatility remained elevated in February with the market’s primary concern shifting from monetary policy to geopolitics as Russia amassed troops on the Ukrainian border, prompting warnings from the United States and other Western countries of an imminent invasion. The rising threat of a major military conflict in Europe for the first time in decades further weighed on stocks in early February. That additional uncertainty, combined with still-stubbornly high inflation readings and continued warnings from Fed officials about future interest rate increases kept markets volatile throughout most of the month. Then on February 24^th, Western warnings of a Russian invasion of Ukraine were fulfilled as Russia invaded in the early morning hours. The conflict sent essential commodity prices such as oil, wheat, corn, and natural gas surging as commodity producers and end users feared production disruptions and reduced supply. As one would expect, markets dropped in response to the invasion, and not just because of rising geopolitical concerns, but also as investors realized higher commodity prices will only add to existing inflation pressures, and in turn, possibly pressure corporate earnings and consumer spending. Geopolitical uncertainty combined with lingering inflation concerns and anxiety over the pace of Fed rate hikes weighed on stocks again in February, and the S&P 500 declined for a second straight month.

Markets remained volatile in early March, as hopes for a relatively quick ceasefire in Ukraine faded and commodity prices stayed elevated. Shortly after Russia’s invasion, the developed world united in a never-before-seen way against Russia, imposing crushing economic sanctions on the Russian economy. But while that demonstrated important unity against Russian aggression, it became clear that the sanctions would also have a negative impact on Western economies, especially in the EU, and that raised concerns about a global economic slowdown. However, stocks did mount a strong rebound in late March thanks to incrementally positive geopolitical and monetary policy news. First, the Ukrainian resistance stalled the Russian advance, and while the situation devolved into an intense humanitarian tragedy in Ukraine, fears of the conflict extending beyond Ukraine’s borders faded over the course of the month. Then, on March 16^th, the Federal Reserve raised interest rates by 25 basis points, the first-rate hike in over three years. But the rate hike was no worse than markets feared, and that provided a spark for a “relief rally” in stocks that produced a solidly positive monthly return for the S&P 500 and carried the major indices to multi-week highs by the end of the quarter.

Closed-end Funds had an interesting start to the year. March provided investors with a bit of a breather from the volatility and whirlwind declines we saw in January and February. Those months offered investors much better short-term opportunities, as is often the case with CEFs (Closed End Funds) when volatility increases. We continue to monitor and take advantage of market pullbacks to find attractive values in the Closed-end fund space as discounts have widened from their 2021 valuations. Market declines typically lead to attractive long-term purchases in the CEF space as discounts typically widen.

Many of the conversations that we have had with clients and other industry experts are about making future returns in equities more predictable. To combat this challenging environment, we believe investing in a diversified ladder of Structured Investments makes sense. As volatility increases, these investments have become more attractive, offering increased downside protection, increased leveraged returns, and higher maximum return caps. If markets continue to decline for the year, the downside protection of Structured Investment buffers will become increasingly important. If markets reverse, and we start to see positive returns, Structured Investments will realize leverage returns up to a maximum return. Remember, while there is day-to-day fluctuation in Structured Investments, the downside protection is only realized at maturity.  As these investments mature, we evaluate the markets and portfolios, and decide if we need to add additional downside protection to the portfolios or move in a direction with more upside potential.

In sum, the first quarter of 2022 was the most volatile quarter for markets since the depths of the pandemic, as numerous threats to economic growth emerged. As we start the second quarter of 2022, investors will need to see incrementally positive progress across geopolitics, monetary policy expectations, and the outlook for inflation if the late-March rally is to continue.