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1st quarter market review & 2nd quarter outlook


A review of the markets in the first quarter followed by a look ahead to second quarter.

Podcast transcript

Coming up, a review of the quarter that was and predictions for second quarter.


From Thrivent Asset Management, welcome to episode 27 of Advisor’s Market360. A podcast for you, the driven financial advisor.

There’s been plenty of action in the markets and economy, so buckle up.

Our first quarter of 2022 review starts with a rundown of headlines – namely, the war in Ukraine and inflation. Then, we’ll look at various economic figures and metrics. The latter half of the episode will cover our outlook for the second quarter, including a catchy way of understanding current market performance: PPP. What does it stand for? Listen to find out.

Let’s begin with our Q1 review. To help us break down the quarter, we tapped into Thrivent Asset Management’s team of experts.

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The two biggest stories that emerged in the first quarter were battles: one figurative and financial, that being the Federal Reserve’s anticipated assault on rising inflation; and the other is literal and lethal, the brutal Russian war on Ukraine and the resulting human suffering. These two battles wreaked havoc with the markets. Stocks tumbled early in the year before regaining their footing in March, while rising interest rates drove bond prices down, as the Federal Reserve, or Fed, initiated a tightening monetary policy aimed at taming inflation.

The S&P 500® Index, tracking the average performance of 500 large-cap stocks, ended the quarter down about 5%. The bond market experienced its worst quarterly performance in years, as the Bloomberg Aggregate Bond Index, which measures the performance of U.S. investment grade bonds, declined approximately six and a half percent. With inflation on the rise, the Fed raised rates a quarter of a percent in March and indicated that additional rate hikes would be forthcoming throughout the year.

On the bright side, employment growth continued to surge, as employers added nearly 1.7 million new jobs. The unemployment rate dropped to 3.6% at the end of March – the lowest level since the pandemic began in February 2020.

As more Americans returned to work, personal income increased by 0.5% in February, according to the Bureau of Economic Analysis, while disposable personal income was up 0.4% and personal consumption expenditures rose by 0.2%. However, when factoring in the effects of inflation, both were slightly down.

Compared with a year earlier – during the peak of the pandemic – retail sales were up over 17% in February, according to the Department of Commerce.

Economic activity in the manufacturing sector improved in March for the 22nd straight month, according to the Institute for Supply Management. And while manufacturing growth has been impeded by supply chain issues, 15 of the 17 industries tracked by the group reported growth for the month.

Moving along, let’s talk about equities.

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Our first deep dive will be on U.S. stocks. After dropping about 8.25% through the first two months of 2022, the S&P 500 Index bounced back by 3.5% percent in March. But overall, as mentioned earlier, the index remained down almost 5% for the first quarter.

The total return of the S&P 500, including dividends, was up a little over 3.7% in March but down 4.6% for the first quarter.

The NASDAQ Index, an electronic stock exchange with more than thirty-three hundred company listings, also bounced back modestly in March, up 3.41% for the month after dropping 12.1% through the first two months of the year. Through the first quarter, it was down just over 9%.

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On the retail front, sales began to move up in the first quarter as consumers recovered from the pandemic. After an increase of 3.8% in January, retail sales were up 0.3% in February, according to the March Department of Commerce retail sales report. Compared with the same period a year earlier, retail sales were up 17.6% in February. 

Non-store retailers, primarily online stores, were down 3.7% for the month but up 13.8% from a year earlier. Restaurants and bars continued to recover, with sales at food services and drinking establishments up 2.5% for the month and 33% from a year earlier.

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When we look at unemployment, we see that, in the first quarter, the economy added almost 1.7 million jobs according to the Department of Labor. The unemployment rate dropped by 0.2% in March for the second consecutive month to just 3.6%, which is generally considered full employment.

And over the past 12 months, average earnings have increased by 5.6%.

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Turning now to the sectors of the S&P 500 Index. The Energy sector led the way, having moved up 39% in the first quarter, while all other sectors except Utilities suffered declines for the quarter.

Utilities, which led all sectors for the month of March with a gain of just over 10%, was up almost 4.8% in the first quarter. Communications Services posted the biggest quarterly drop, down by almost 12%, followed by Consumer Discretionary, down just over 9%.

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And now, a lightening round of vital statistics from the first quarter: 

Bond yields moved up in the first quarter as inflation continued to rise. The Fed, which bumped up rates a quarter percent in March, is expected to make additional rate hikes throughout the year to combat rising inflation. The yield on 10-year U.S. Treasuries rose about 0.8% in the 1st quarter. 

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Corporate earnings expectations continued to rise as the economy recovered. The 12-month advanced earnings per aggregate share projection for S&P 500 companies climbed almost 4.3% in the first quarter. 

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The forward price-earnings ratio of the S&P 500 declined slightly in the first quarter, as earnings projections rose, and stock prices slipped. 

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The dollar appreciated just over 2.1% versus the Euro in the first quarter. The rising dollar has been attributed, in part, to the relatively quick economic recovery that the U.S. has made from the pandemic. In addition, the Ukrainian war – along with Russian sanctions – has impacted the Euro. The dollar has also appreciated versus the Yen, up 5.4% in the first quarter. 

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While rising global demand was already driving oil prices higher as the world recovered from the pandemic, the boycott of Russian oil in response to the Ukraine attack pushed prices even higher. West Texas Intermediate, a grade of crude oil used as a benchmark in oil pricing, surged to more than $123 per barrel in early March before slipping back down to about $100 per barrel at the end of March.

The drop in prices was due, in part, to President Biden’s commitment to release one million barrels of oil a day from U.S. oil reserves – the nation’s largest release to date. Through the first quarter, oil prices rose over 33%, while gasoline prices at the pump jumped over 28%.

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Gold prices moved up almost 6.2% in the first quarter. 

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And finally, international equities made a slight recovery in March, with the MSCI EAFE Index, which tracks developed-economy stocks in Europe, Asia, and Australia, up 0.1% for the month. But for the quarter, with the Ukrainian crisis taking center stage, the index dropped about 6.6%.

That wraps up our first quarter review. Let’s look ahead to Q2. 

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What’s the market outlook for the second quarter of 2022? We asked Steve Lowe, CFA, Chief Investment Strategist to give us his thoughts about the two battles taking center stage in the second quarter: The Fed against inflation, and Russia against Ukraine. 

Both are expected to have profound impacts on the financial markets throughout the year. The fog of these battles likely will keep market volatility elevated and returns subdued relative to the past few years. 

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The Fed followed through on its intention of reining in advancing inflation. Although its first volley of raising interest rates was only 25 basis points, the Fed openly suggested that a more aggressive campaign against inflation may be forthcoming. Short maturity treasury bond yields surged about 150 basis points higher, while longer term yields rose roughly 75 basis points, resulting in the worrisome development of a dramatically flattening Treasury yield curve. 

Flat yield curves have often been an early warning of recession. Credit spreads also widened materially. The result is that the bond market suffered its worst quarterly performance in years, with the Bloomberg Aggregate Bond Index declining approximately 6% through the first quarter, which was worse than the S&P 500 equity index market return. 

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The devastating Russian invasion of Ukraine has contributed a new variable into the global economy and financial markets. Russia and Ukraine, although both relatively small from a global economic perspective, are significant producers of commodities, especially energy and foodstuffs.

The destructive consequences of war are contributing additional inflationary pressures to the commodity markets. Meanwhile, additional pressure is being placed on already fragile global supply chains, due to the far-reaching economic sanctions imposed on Russia, and the large number of multi-national companies opting out of doing business in Russia. 

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So, what effect do these conflicts have on the financial markets? In looking at major market index returns for both bonds and stocks, it’s interesting to note the consistency of results. All of the major asset sectors have had negative returns in a range of roughly 4–7% through the end of March. However, these index numbers mask a wide dispersion of returns for the constituents that make up these indexes. 

Commodities and commodity-oriented companies vastly outperformed the broad market, with high double-digit returns, while many very highly-valued growth stocks declined sharply. The common theme has been that real assets, stocks of companies with solid fundamentals, and value-oriented investments have vastly outperformed riskier counterparts across asset classes.

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Let’s drill down on the keys to market performance – it’s time for the three P’s mentioned at the top of the episode. They are: prices, profits and price-to-earnings multiples.

The first P is for prices. As mentioned, the Russian invasion has caused commodity prices, especially oil, to surge. However, subsequent to the initial significant price spikes, oil and commodities prices have generally come off the boil somewhat, although price volatility remains high. A more significant longer-term issue with inflation is labor price pressure and consumer inflation expectations, both of which continue to build.

The Fed seems to be factoring this into its hawkish rhetoric about fighting inflation—count on the Fed’s offensive against inflation to continue. Equity market performance had been understandably weak at the onset of this policy change. However, more recently, stocks have actually risen in tandem with bond yields. This is a possible sign that the equity market, at least for now, is more comfortable with the Fed’s tactics.

The second P is for profits. Corporate profitability has been the main buttress in supporting the equity market. Profit reports for the fourth quarter of 2021 were quite strong as the impacts of the pandemic began to recede. First quarter earnings reports will be carefully scrutinized regarding the impact that both “input price pressure” and escalating labor costs may have on profitability. It’s expected that profits will moderate, but not collapse in the coming quarters. And moderating corporate profits also imply moderating expectations for equity performance.

The third P is for P/E multiples. With most stock prices experiencing meaningful declines in the first quarter, even with strong profit reports, P/E, or price-to-earnings, multiples, declined. This reduction in equity market valuation is not surprising given the increased level of uncertainty and rising interest rates. Elevated uncertainty in this current environment will remain an impediment to any significant multiple expansion that could drive equity markets meaningfully higher. However, the relatively cheaper P/E market valuation and ample levels of liquidity in the financial system will provide some level of support to the equity market.

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So, what’s a financial advisor to make of all of this? In such an environment, it is useful to let the beacons of solid fundamentals, high quality, and rational valuation be your guide – regardless of investment sector. The discipline of rebalancing portfolios is also very important. Let’s look at where we think fixed income and equities are headed.

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After the worst bond market performance in nearly two decades, some semblance of value is emerging in fixed income markets. However, with scant evidence of inflation receding, and the Fed now more on the offensive regarding monetary policy, expected returns remain muted. That being said, with two-year Treasury securities yielding well over 2% – after trading at a quarter of a percent the past two years – the market is already pricing in many more rate increases.

Assessing value in longer maturity fixed income – 10 to 30 years – is more challenging. On one hand, inflation remains high, resulting in negative real yields for long-term investors. As a reminder, real yield is the yield less expected inflation. On the other hand, if the flattening yield curve is correct in signaling rising recession risks, then long-dated bonds would be attractive at current levels given that inflation and interest rates would be expected to decline in a more difficult economic environment.

In the corporate and high yield bond markets, credit spreads seem fair given a still strong economy, low default rates, and ample liquidity in the system.

In short, bond yields are now more attractive than they have been in years, but it is in a highly uncertain inflationary environment. Given that there is little evidence of inflation retreating, long-duration assets still seem at risk. Therefore, the intermediate maturity fixed income sector currently seems like a reasonable risk/reward proposition. Adding yield through a focus on the credit and mortgage sectors also seems appropriate.

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Now let’s turn to the equity market. Stocks have been resilient in the face of high inflation, tightening Fed policy, surging interest rates, and war in Europe. In the first quarter, the large cap growth sector of the market initially sold off much more sharply than the value sector due to their greater sensitivity to higher interest rates.

Recently, the growth sector seems to be finding its footing from a relative performance perspective. The growth sector – and technology in particular – have some advantages over other more industrial, value-oriented sectors in that they are less impacted by input inflation, have pricing power, and are well capitalized. Although valuations are still high, this dynamic sector should still be a core holding in portfolios.

Value stocks were the stars during the first quarter, after years of lagging performance relative to growth. The value sector continues to have appeal, although it should be noted that the materials and energy sectors are heavily represented in this area of the market. However, with inflation expected to stay elevated, value stocks should continue their solid performance as long as economic growth holds up. Value stocks tend to underperform when the economy declines, as earnings growth becomes scarcer, and investors turn to growth stocks.

The small cap area of the market has been in a state of churn. A disproportionate percentage of companies in this space are unprofitable, especially in the biotechnology area of the market.

Companies without profitability have been particularly hard hit over the past quarter. However, a number of smaller, higher-quality companies with solid business and earnings fared relatively well. Therefore, generalizations about valuation in the small cap sector are difficult. This is an area that requires astute security selection and careful active management.

International equities, and especially emerging market equities, underperformed U.S. indexes during the first quarter. There was also tremendous divergence in performance by country and sector within international indexes, as Chinese stocks plummeted, and Russian stock trading was halted due to sanctions. Ultimately, Russian equities were removed from major emerging market indexes as well, causing further confusion in this volatile market.

This turmoil has caused international markets to now be priced at exceedingly low valuations. But even at such low valuations, there remains significant risk in international markets for obvious reasons. Caution still seems to be warranted in making an allocation to non-U.S. markets.


Thanks for listening to this episode of Advisor’s Market360™. All episodes are available on Apple Podcasts, Spotify, and Google Podcasts. We’d like to hear from you! If you’ve got questions or comments about the podcast, or have an idea for a topic, email us at You can also learn more about us at and find other items of interest to you, the driven financial advisor. Bye for now.


All information and representations herein are as of April 7, 2022, unless otherwise noted.

Any indexes discussed are unmanaged and do not reflect the typical costs of investing. Investors cannot invest directly in an index.

Past performance is not necessarily indicative of future results.

Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

Thrivent Asset Management, a division of Thrivent, offers financial professionals a variety of investment products to help meet their clients’ needs. Thrivent Distributors, LLC is a member of FINRA and SIPC and a subsidiary of Thrivent, the marketing name for Thrivent Financial for Lutherans.

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