Why Q1 Was So Strange

Submitted by Nicholas Colas of Datatrek

Q1 2022 saw the first sharp break lower for US/global equities since the March 2020 pandemic lows, so what happened and what does it say about current and near-future market narratives? Three points to answer that question:

First, here are price returns from the end of 2021 to the early-mid March 2022 lows for select global and US equity market indices:

• MSCI All-Country World Index: -13.1 percent (March 8th lows)
• MSCI All-Country ex-US Index: -13.3 pct (March 7th lows)

• S&P 500: -12.7 percent (March 8th lows)
• Russell 2000: -13.6 pct (March 14th lows, late January lows -14.1 pct)
• NASDAQ Composite: -20.1 pct (March 14th lows)

• MSCI Europe: -18.7 percent (March 7th lows)
• MSCI Japan: -13.0 pct (March 8th lows)

• MSCI Emerging Markets: -15.4 percent (March 14th lows)
• MSCI China: -28.4 pct (March 15th lows)

Comment: European and Chinese stocks forcefully dragged global equity markets lower from the start of the year to the early-mid March bottom. Rising oil prices and the Russia-Ukraine conflict explain Europe’s underperformance. Chinese equities had been under pressure since February 2021 due to a host of pandemic- and local Big Tech regulatory-related issues. Higher oil prices and continuing concerns about regulation put even more of a strain on China’s stock market from January – mid-March 2022. The NASDAQ and Russell, riskier indices with a perennially +1.0 beta, sold off harder than the S&P 500.

Now, here is how each of these indices has fared from their respective March lows through today:

• MSCI All-Country World Index: +9.0 percent
• MSCI All-Country ex-US Index: +8.3 pct

• S&P 500: +9.7 percent
• Russell 2000: +7.0 pct
• NASDAQ Composite: +14.1 pct

• MSCI Europe: +12.5 percent
• MSCI Japan: +6.2 pct

• MSCI Emerging Markets: +8.8 percent
• MSCI China: +18.8 pct

Comment: the snapback from the lows for global equities earlier this month was most pronounced in European and Chinese stocks, mirroring the returns during the meltdown. That the Russia-Ukraine crisis did not spiral into a wider European conflict has helped the region’s equity markets bounce back. Separately, the Chinese government finally realized that its local equity market was getting dangerously close to free-fall and stepped in to reassure investors that it understood it had to tread more lightly.

As for other reasons early-mid March was the low for global equities, consider the following:

• WTI Crude peaked on March 8th at $124/barrel, now $100/barrel
• Gold peaked on March 8th at $2,043/oz, now $1,923/oz
• Euro/dollar exchange rate troughed on March 7th at $1.085, now $1.100
• Chinese offshore yuan/dollar exchange rates peaked on March 14th at 6.395, now 6.385
• The CBOE VIX “Fear Gauge” Index peaked on March 7th at 36.5, now 19.6. The first number is 2 standard deviations from the mean, the second is the long run mean back to 1990.

So, we know oil, gold, currencies, and market fear all peaked at/near the lows, but here’s what DID NOT peak at the same time:

• 2-year Treasury yields, a market proxy for Fed policy, which were 1.6 – 1.7 percent mid-month but are 2.34 percent today.
• 10-year Treasury yields, a market proxy for the US neutral rate of interest, which were 1.9 – 2.0 percent mid-month but are 2.47 percent now.
• 10-year German and French sovereign bond yields, market proxies for the European neutral rate of interest, which were 0.00 – 0.75 percent mid-month but are 0.59 – 1.00 percent today.

Takeaway: geopolitics/oil prices and Chinese economic/commercial policy uncertainty were more important market narratives in Q1 than changing market perceptions of future Federal Reserve rate hikes. If a more hawkish Fed really were a market driver, we wouldn’t be rallying into quarter end with bond markets discounting ever-more aggressive Fed policy by the day. As for what captures the market’s attention in Q2, we think the 1-word answer is “earnings”. As long as Russia-Ukraine does not cause another oil price spike, the market only has to worry about Fed policy (which it now assumes will be aggressive) and corporate earnings power. That’s not a bad setup as we start the second quarter; if the last 2 years have shown us anything, it is that American companies know how to generate strong profits.