Dear Yieldstreet investor,
In the first quarter of 2022, the specter of a “stagflation” caused by a combination of an energy shock, a sanctions-driven supply chain crisis, and a slowing global economy fueled market volatility, with most investors scrambling for protection. Market conditions improved by the end of the quarter, but uncertainty remains on both domestic macroeconomic projections and on the outcome of the Ukraine-Russia war.
US equities ended the quarter down single digits, with tech stocks being the largest detractors. The Dow and S&P 500 lost approximately 3%, while the Nasdaq was down more than 7%. For all three averages, Q1 2022 has been the first negative quarter since Q1 2020, which marked the start of the Covid pandemic in the US.
Inflation readings remained high, in line with projections. The core PCE index, which measures consumer prices except for food and energy, was up 5.4% YoY as of February, its highest level since 1983. However, negative Chinese growth data – and the US releasing its strategic oil reserves – by the end of the quarter appeared to be taming the ongoing rally in oil prices, a potential factor to watch for future inflation projections.
On the monetary policy front, as of mid-March, the market was pricing in seven Fed rate hikes for 2022 – with some participants anticipating a faster tightening – in line with the Fed dot plot from the March 16 meeting. Other major central banks – in particular the ECB – are also coping with higher inflation in a context of increased geopolitical risk, a true conundrum as excessively aggressive monetary tightening may trigger a recession if disruptions from the Ukraine-Russia war, including sanctions, end up impacting global demand.
Driven by higher inflation and by the projected Fed tightening, US Treasuries sold off heavily, despite a widespread risk-off turn in the early days of the Russian invasion. The 10-year yield closed the quarter at 2.6%, slightly lower than the 2-year, an “inversion” of the yield curve that can point to a recession, but that can also be attributed to the Fed swiftly raising short-term rates after a prolonged period of ultra-loose monetary policy. The S&P 500 US investment corporate bonds index was down 7.2%, while the corresponding HY index lost 4.8%.
Cryptocurrencies suffered from high volatility, driven by regulatory risk – related to a US government decision to launch a more comprehensive review of the asset class – as well as headline risk, with policymakers lashing out at their potential use to circumvent financial sanctions. On the other hand, crypto donations also flowed to the Ukrainian army, generating a more positive narrative. Eventually, the asset class saw large inflows by the end of the quarter, with prices staging a robust recovery.
The residential real estate market remained resilient, if perhaps a little frothy, posting strong gains in January, with the Case-Shiller index up 19% YoY. In a March survey, 95% of realtors pointed out that buyers are outnumbering sellers, unchanged from January’s record high, while 89% of agents noted home prices increased in February, up 4% month-over-month and a new survey record. Commercial real estate continued to attract capital. Overall, macro volatility combined with rising rate expectations has tempered success in sourcing attractive equity investments.
Going forward, the outlook for Q2 remains uncertain. IMF growth projections, which at the beginning of the quarter pointed to a 4.4% increase in global GDP for 2022, are likely to be downgraded due to spillovers from the Russia-Ukraine war, which is having a sizable global impact through higher food and energy prices, disproportionately hitting emerging markets. China’s growth prospects also appear to be uncertain, as the country continues to pursue a zero-Covid strategy, a potential headwind for economic activity.
All these factors are expected to continue to impact public market performance, potentially leading to lower returns in 2022 than the ones achieved in the past two years. While not completely insulated from macroeconomic risk, investments in alternative assets can be less sensitive to broader macroeconomic risk, while providing – in some cases – growth opportunities for investors with a longer time horizon.
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Resources:
1. Source: Goldman Sachs Research. US Daily: Moving “Expeditiously” Implies a Faster Pace; Forecasting 50bp Hikes in May and June (Mericle/Hatzius)
2. Source: https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20220316.pdf
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