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Looking Back at the Markets in March and Ahead to April 2022

Written by Brad McMillan, CFA®, CFP® | Apr 5, 2022 8:28:40 PM

We saw a bit of a bounce in stock markets in March, but not enough to recover from a terrible first quarter. U.S. markets were up between 2 percent and 4 percent for the month, and developed markets managed to squeak out a small gain, but everything else was down from 1 percent to 3 percent. For the quarter, markets were down between 3 percent and 8 percent, with blue-chip companies doing best and tech stocks getting hit the hardest.

Looking Back

Inflation. There were two reasons behind the markets’ poor performance in the first quarter. First, the continuing strength of the economy, along with the lingering supply chain problems, pushed inflation to a 40-year high. This forced the Fed to raise interest rates for the first time since the start of the pandemic. That increase, and the fear of more, drove interest rates higher around the world, shaking financial markets.

Ukraine war. The second reason was the Russian invasion of Ukraine. This war unsettled markets and created the prospect of energy and food shortages, generating even more uncertainty around the global economy. So it was a very rocky start to the year for markets.

Job and spending growth. Despite this difficult start, things in the U.S. kept improving. Covid-19 cases ended the quarter at the lowest level since last summer. Hiring was strong and supported current consumer confidence and spending growth, and business confidence and investment remained healthy. From both medical and economic standpoints, things were better at the end of the quarter than at the beginning. And after pricing in the expected interest rate increases, as well as the emerging risks from the Russian invasion, markets started bouncing back in March.

Looking Ahead

Continued recovery. Looking forward, the question is whether that improvement will continue into the second quarter. On the whole, it looks like it will. On the medical side, progress has slowed, and we may face the prospect of another pandemic wave. But the economy has proven to be robust throughout the prior waves. Plus, with current high levels of immunity, any damage should be minor and not derail the recovery.

Economic growth. On the economic side, we are seeing little to no direct damage from the Ukraine war in the data. Even future damage, such as energy or food shortages, is likely to be limited as much of the price effects are already showing up. The next quarter should see continued economic growth, even if we experience another pandemic wave.

Strong markets. Much of the poor performance in the first quarter came from the prospect of higher interest rates, and this was incorporated into prices. With markets expecting multiple hikes, that is already priced in—and markets can now react to better economic and earnings news. Similarly, uncertainty about the Ukraine war spiked in March, but many of the worst possibilities failed to materialize, leaving the potential for upside ahead. The big picture is that the first quarter had several risks priced in, such as Covid-19, inflation, and continued supply chain issues. For the next quarter, those risks are now part of the picture, rather than a shock. And with a solid baseline for markets, companies are proving they can operate and make money under these conditions. This is a sound foundation for progress as we move into the second quarter.

Headlines. That’s not to say that nothing bad can happen—Covid-19 could surge again, the Ukraine war could expand, and hiring could slow substantially. And if and when those bad things happen, we will likely see more market volatility. As always, the headlines will drive much of market performance in the short term, as we saw in the past quarter. But, despite the headlines, the fundamentals will ultimately drive both the economy and the markets and are likely to remain sound over the second quarter.

The Bottom Line

Looking back, the first quarter was a difficult one for markets, but that was primarily driven by expected rate hikes, which, in turn, were supported by the strength of the economy. Looking forward, that strength is likely to continue—the rate hikes are already priced in, and the fundamentals for markets remain sound. While we have seen substantial volatility—and may see more—this provides a good foundation going forward. With a solid medical and economic base, the second quarter has the potential to be better for markets than the first.