Kevin Barr, Head of SEI's Investment Management Unit, provides an overview of the global financial markets and our perspective on them.
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- Hi, I'm Kevin Barr, head of SEI's Investment Management Unit. Over the next few minutes, I'll provide an overview of the global financial markets and our perspective on them.
Investors faced difficult conditions on multiple fronts during the first quarter of 2022.
Global equities declined, delivering their poorest quarterly performance since early 2020. Global bonds fared worse, tumbling by the most since late 2016. On a brighter note, commodities had their strongest quarter in at least the last 30 years.
While the crisis in Ukraine overshadowed everything else, if we focus on the equity markets, we can see that a great deal of the damage was already done by late January. In fact, stocks spent more time rallying than declining from late February through the end of the quarter.
It is no surprise that commodity-producing nations were the first quarter's big winners, led at a distance by Latin American equities which posted large double-digit gains.
Canadian and UK shares also earned positive returns during the quarter. While Hong Kong was down slightly, the US, Japan and Europe posted steeper losses. Mainland China shares plummeted from mid-February to mid-March before rebounding, but still finished the quarter with double digit losses.
Interest rates on government bonds rose across all maturities in the US, UK and Euro zone during the quarter. Yield curves flattened as shorter-term rates climbed by more than longer term rates.
The US treasury market saw several instances in which short-term interest rates exceeded long-term rates. Market Watchers refer to this as a yield curve inversion. While this condition often indicates a pending recession, we don't expect to see one this year or next.
Still, bonds delivered negative returns as interest rates climbed.
Inflation index securities had relatively mild declines, while emerging market debt and investment grade corporates tumbled.
We'd be hard pressed to tell the story of the first quarter without a closer look at commodities. These markets were the financial epicenter of the fallout from Russia's attacks on Ukraine and their associated consequences. The price of natural gas spiked by more than 50% during the first quarter, while West Texas intermediate and Brent crude oil prices, both climbed by more than 30%. The price of wheat also finished the quarter more than 30% higher. Consumers felt the downstream impact in their wallets as inflation drove prices higher at the gas pump and at the grocery store.
While higher interest rates appear to be the global trend among central banks, which will increase the cost of borrowing, households and businesses were in good financial shape coming into this rate-hiking cycle. With demand for consumer goods remaining strong, we think it will take some time for major problems to develop in the economy.
Still, periods of crisis and instability are worrying for all investors, particularly as short-term events can be difficult to predict. For this reason, diversification has been one of the hallmarks of SEI's investment philosophy and process. While delivering that message has been a challenge in recent years, as a small segment of the market drove outsize gains, the market conditions we are seeing today reinforce our belief in diversification as a sound investment strategy.
On behalf of everyone at SEI, thank you as always for your trust and confidence.
Glossary of financial terms
- Investment grade: Investment grade refers to the credit rating of a debt issuer. Debt securities rated investment grade present relatively low credit risk, or the risk of default, compared to debt with a non-investment or speculative grade rating.
- U.S. Treasury Inflation-Protected Securities (TIPS): U.S. Treasury Inflation-Protected Securities are securities issued by the U.S. Treasury designed to provide investors with protection against inflation. The principal of a TIPS typically increases with inflation and decreases with deflation.
- Yield: Yield is a general term for the expected return, in percentage or basis points (one basis point is 0.01%), of a fixed-income investment.
- Yield curve: The yield curve represents differences in yields across a range of maturities of bonds of the same issuer or credit rating (likelihood of default). A steeper yield curve represents a greater difference between the yields. A flatter curve indicates the yields are closer together.
- Bloomberg 1-10 Year US TIPS Index: The Bloomberg Barclays 1-10 Year US TIPS Index measures the performance of inflation-protected public obligations of the U.S. Treasury that have a remaining maturity of 1 to 10 years.
- Bloomberg Global Aggregate ex-Treasury Index: The Bloomberg Barclays Global Aggregate ex-Treasury Index is an unmanaged market index representative of the total-return performance of ex-Treasury major world bond markets.
- Bloomberg Global Treasury Index: The Bloomberg Barclays Global Treasury Index is composed of those securities included in the Bloomberg Barclays Global Aggregate Bond Index that are Treasury securities.
- Bloomberg U.S. Corporate Bond Index: The Bloomberg Barclays U.S. Corporate Investment Grade Index is a broad-based benchmark that measures the investment-grade, fixed-rate, taxable corporate bond market.
- Bloomberg U.S. Treasury Index: The Bloomberg Barclays U.S. Treasury Index is an unmanaged index composed of U.S. Treasurys.
- ICE BofA U.S. High Yield Constrained Index: The ICE BofA U.S. High Yield Constrained Index tracks the performance of below-investment-grade, U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market and caps exposure to individual issuers at 2%.
- JPMorgan EMBI Global Diversified Index: The JPMorgan EMBI Global Diversified Index tracks the performance of external debt instruments (including U.S. dollar-denominated and other external-currency-denominated Brady bonds, loans, eurobonds and local-market instruments) in the emerging markets.
- JPMorgan GBI-EM Global Diversified Index: The JPMorgan GBI-EM Global Diversified Index tracks the performance of debt instruments issued in domestic currencies by emerging-market governments.
- MSCI ACWI Index: The MSCI ACWI Index is a market capitalization weighted index composed of over 2,800 companies, and is representative of the market structure of 50 developed and emerging market countries in North and South America, Europe, Africa, and the Pacific Rim. The index is calculated with net dividends reinvested in U.S. dollars.
- S&P 500 Index: The S&P 500 Index is an unmanaged, market-capitalization weighted index that consists of the 500 largest publicly traded U.S. companies and is considered representative of the broad U.S. stock market.
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