Black quarter for US stock markets: what happened?

The first quarter of 2022 started out poorly for equity investors, with the S&P 500 declining by 11% during the first 16 trading days of the year and recording 35 down days for the quarter—according to Bloomberg, the most first-quarter daily declines since 1984. February was a particularly disastrous month, with the S&P 500 declining by 2.99% and the Nasdaq 100 declining by 4.5% to finish down 12.6% through the end of February. Toward mid-March, however, sentiment shifted and the equity markets (as measured by the S&P 500) staged an energetic rally, advancing ~8.5% in ~13 trading sessions. Even so, for the first quarter of 2022, the S&P 500 still declined by 4.6% (its first quarterly decline in 2 years) and both the Nasdaq and the Russell 2000 entered bear market territory (typically defined as a fall of 20% or more from recent highs). According to Boyar Value Group, from a historical perspective, “such developments are not surprising, with midterm election years having historically produced large intrayear pullbacks (17% on average, according to LPL).”

It is also worth noting that midterm election years tend to produce strong year-end rallies (although this year has been anything but typical). The decline in the major averages does not tell the whole story, however, because the typical stock has done significantly worse than they have. While not a complete apples-to-apples comparison, as of April 6 the “average stock” in the S&P 500 had declined by almost 17% from its 52-week highs, a figure that for the Russell 3000 exceeds 32%.

Some of the best-performing technology stocks over the past decade had a horrible first quarter. According Gunjan Banerji, writing in the Wall Street Journal, Meta platforms (formerly Facebook) lost ~$232 billion in market value in a single trading session, Netflix lost 38% of its value during the quarter, and Salesforce had its worst quarterly performance since 2011. Such dismal performance stands in stark contrast to the strength exhibited by energy shares, which enjoyed their best quarterly performance in history by advancing 38%, with companies Occidental Petroleum and Halliburton increasing by 95% and 65%, respectively. While the energy sector’s advance from the beginning of 2021 through 1Q 2022 has been impressive (advancing over 114% with dividends reinvested), it is worth remembering that energy shares fell ~33.6% in 2020 (with dividends reinvested). Historically energy shares have not been a good place for equity investors: from January 1990 through 1Q 2022, the energy sector gained ~1,527% (with dividends reinvested), compared with 2,403% for the S&P 500 (with dividends reinvested). For this reason (and to avoid wild price swings), we typically avoid shares in energy-related companies.

Nine of eleven S&P 500 sectors were in the red, with Utilities the only other sector to advance (increasing by 4.8%). Communication Services was the worst performer, losing 11.9%, followed by Consumer Discretionary, which lost 9.0%, and Technology shares, which declined by 8.4% yet at 24.4x (fwd.) earnings are still selling significantly above their 20-year forward P/E ratio of 18.3x.

The pain was felt across almost every asset class as well as globally. “Safe” Treasuries declined by 5.6%, investment-grade bonds fell by 7.8%, and municipal bonds posted their worst quarter in ~40 years, with a 6.4% loss (erasing $108 billion in market value from Bloomberg’s municipal bond index for the first quarter of 2022). Indeed, more than $3 trillion in value was erased from fixed income and stocks during the first quarter, according to data from Bloomberg. The pain was worse for Chinese investors, whose CSI 300 index (comprising the largest companies listed in Shanghai and Shenzhen) lost 15% during the first quarter of the year, the worst quarterly decline since 2015. The Nasdaq Golden Dragon China Index, consisting of U.S.-listed Chinese stocks, declined by 21% for the quarter.

The only major asset class that performed well was commodities, with the Bloomberg Commodity Index advancing 25% for its best quarter since 1990. The increasing price of oil grabbed the bulk of the headlines as U.S. oil futures surpassed $130 a barrel in early March (though they have since declined to around $100 per barrel). This is a far cry from ~2 years ago, when on April 20, 2020, WTI crude settled at a negative $37.63 per barrel! Notably, wheat prices advanced 31%, recording their best quarter since 2010, and nickel became so volatile that the London Metal Exchange had to close trading in the metal for over a week to restore order.

So, what caused all this pain across nearly every major asset class? John Authers, writing for Bloomberg, said it best: “Two huge shocks dominate the landscape—the sharp hawkish turn by the Federal Reserve and other central banks, and Russia’s invasion of Ukraine. These events between them naturally increased the risk of a recession or economic slowdown. They also dented hopes for earnings growth. Higher interest rates, international disruptions, and spiking commodity prices all make it harder for companies to make money.”