April 2022 Commentary

As the Omicron wave of COVID-19 subsided in most parts of the world, border restrictions were either relaxed or removed in a number of countries, and businesses and individuals began to look forward to lives that may somewhat resemble pre-COVID-19 days.  This said, global markets did not have the best month in April due to a slew of reasons—including the ongoing Russia-Ukraine conflict, global supply chain disruptions, tightening COVID-19 restrictions in China and inflationary pressures.

Global equities were down 8.15% (as per the EMIX All World Index).  U.S. Treasuries fared slightly better but still ended the month down 3.23%.  In Asian fixed income, the iBoxx Asian Local Bond Index

(ALBI) (unhedged in USD) was also in the red, losing 3.92%, as all eligible markets except China Onshore (up 0.29%) lost ground.  The worst-performing markets were Thailand (‑3.86%) and Malaysia (‑3.05%).  Apart from China Onshore and the Philippines, all other markets recorded losses (in local currency terms) across the yield curve.  The largest losses were concentrated in the long end.  Of these, Thailand 10+ (-7.12%) and Hong Kong 10+ (-6.97%) were notable.  On the bright side, China Onshore saw modest gains across all maturity bands.

Through April, the overall index yield increased by 26 bps to 3.99%.  Excluding China Onshore (‑1 bp), all other underlying markets saw yield increases, with Hong Kong climbing 56 bps to 3.51%—exceeding 3.5% for the first time since index inception.  India remained the highest-yielding bond market in the index, offering 7.19%, while Singapore (2.79%) was the lowest-yielding market.

KEY HIGHLIGHTS

• The S&P 500^® was down 8.80% in April, bringing its YTD return to -13.31%.
• The Dow Jones Industrial Average^® lost 4.91% for the month and was down 9.25% YTD.
• The S&P MidCap 400^® dropped 7.18% for the month, bringing its YTD return to -12.02%.
• The S&P SmallCap 600^® was off 7.87% in April and had a YTD return of -13.34%.

MARKET SNAPSHOT

April showers (i.e., the Russia-Ukraine conflict, inflation, interest rates, continued labor shortages, supply chain issues, and politics) did not bring flowers, but rather brought U.S. equities down for the month. The S&P 500 traded in a high/low range of 11.38%, compared with the pre-COVID-19 historical monthly average of 6.86%. The index posted an 8.80% decline for the month (4,131.93 compared with last month's 4,530.41), ending the month with its worst one-day return (-3.63%) since June 11, 2020 (-5.89%), and in correction territory; it was also down 13.86% from its Jan. 3, 2022, opening day closing high of 4,798.56 and replaced the recent low set on March 8, 2022 (of 4,170.70), with the index at -13.31% YTD.

Meanwhile, the mask mandate was lifted for domestic flights, but it was still in effect for the New York City subway. While the debate (and legal battles) on masks has continued, the Street appeared fully unmasked when it came to predictions regarding the U.S. Fed's dot plot: (i) no dots became a 0.25% interest rate increase, then 0.50% as the month went on, with 0.75% just a mention (for now); (ii) transient became irrational inflation, which became signs of peaking; and (iii) diving into a hard landing became a 2023 recession, and then employment, money and wealth may let us skirt (or limit) it. Typically, with so many views you would expect one of them to be right, but given all the uncertainty, looking beyond the short term may be easier—as long as you have liquidity and cash flow (an untaxed portfolio is not a cash account).

As for market fundamentals: earnings and sales for Q1 2022 so far have beaten estimates and were up year-over-year (8.5% and 11.9%, respectively), but they were down from the record Q4 2021 numbers (-9.3% and -3.8%, respectively). Significant EPS impact due to share count reduction for the Q1 2022 period was 17.8% of the reported issues, compared with 14.9% in Q4 2021, 5.8% in Q1 2021, and 24.9% in Q1 2019. Operating margins for Q1 2021 remained high, coming in at 12.64%, down from 13.41% in Q4 2021 (the average from 1993 was 8.21%, and the record is 13.54% in Q2 2021). Forward guidance, however, has been an issue as the economy has started to slow down.

Sales are the bigger concern, and the ability to pass along cost increases appears to be showing signs of consumer fatigue (Q1 2022 operating margins remain high at 12.64%, but are expected to decline; the historical average is 8.21%). Dividends continue on a slow upward trend, with few decreases and measured increases. Interest rates, as measured by the U.S. 10-year Treasury Bond, continue to flirt with 3%, while they are moving faster for the average 30-year mortgage rate, which was up over 200 bps from year-end 2021 (to 5.37% from 3.06%), and that cost is before the higher mortgage amounts due to higher home prices (up 20.2% year-over-year in February 2022). The impact on housing has been a slowing of sales, but demand remains high as supply is low, as higher home prices and interest rates are expected to reduce the demand, and eventually prices.

While Biden continued to send military equipment to Ukraine, Washington took a back seat, as no one wanted to speak of spending programs or taxes. Florida became the political center, as it passed a bill that would prohibit "classroom discussion about sexual orientation or gender identity." Several corporations, including Walt Disney (DIS) openly opposed the bill. The Florida legislature then passed a bill repealing Disney's special tax status, which was used in 1967 to attract Disney to the state.

On and off "peace" talks continued between Russia and Ukraine, as some progress was seen, with Ukraine proposing a "neutral status" and U.S. markets reacting positively. After an incomplete northern invasion of Ukraine, Russian forces regrouped (creating a temporary lull in the conflict), and then launched an incursion into eastern Ukraine (Donbas). The U.S. continued to send military aid, as the latest reports of war atrocities included mass graves (near Mariupol). Ukraine Prime Minister Shmyhal said rebuilding Ukraine would cost USD 600 billion (2020 GDP was USD 156 billion). U.S. Secretary of State Blinken and Secretary of Defense Austin went to Kyiv, Ukraine and met with President Zelenskyy. Russia said it had stopped gas flows to Bulgaria and Poland after they declined Russia's demand to pay in rubles.

Oil closed at USD 104.13 (it had reached USD 130.50 this year) and was up 38.1% YTD (USD 75.40), as EIA all-grade gasoline was up 24.8% (USD 4.211 from year-end 2021's USD 3.375; it reached USD 4.414 in March 2022). From year-end 2020, oil was up 115% (USD 48.42 per barrel), as gasoline was up 80.7% (USD 2.330 a gallon). For 2021, the EIA reported that the makeup of gasoline costs was 53.6% from crude oil, 16.4% from federal and state taxes, 15.6% from distribution and marketing, and 14.4% from refining costs and profits.

The S&P Kensho New Economy Indices seek to track the industries and innovation of the Fourth Industrial Revolution

TOP THREE FROM ACROSS THE NEW ECONOMIES

Drones (11.5%): 2022 kicked off with a challenging start for technology and innovation stocks under pressure from inflation, rising rates and concerns over a potential recession.  The outbreak of the Russia-Ukraine conflict on Feb. 24, 2022, significantly affected the global economy.  Drones, one of the underperforming subsectors in the previous quarter, took off with accelerated demand for U.S. unmanned aircrafts from the battlefield.  Within the first three days of the conflict, this subsector gained 14.1%.  In mid-March, the U.S. government announced USD 800 million in military support to Ukraine, including 100 Switchblade drones, further fueling the subsector’s performance.  AeroVironment, the manufacturer of Switchblade Drones, and airborne electronic systems providers such as Elbit Systems and Rada Electronic Industries were the other leading contributors to this outperformance.

Clean Energy (7.9%): The Russia-Ukraine war magnified the risk of the world’s dependence on fossil fuels, potentially speeding up the transition to alternative energy sources such as solar and wind.  On March 8, 2022, U.S. President Biden signed an executive order to ban the import of Russian oil and gas, promptly followed by similar orders from European allies.  Clean energy stocks benefited from the rising prices of traditional energy sources—the price of WTI crude oil increased by USD 30.40 per barrel (or 40.2%) during the first quarter.  Companhia Paranaense de Energia (Copel), Centrais Elétricas Brasileiras and Enbridge also saw notable gains during this period.

Space (3.6%): Mixed news from various constituent stocks sent the Space subsector Q1 performance on a turbulent ride.  On one hand, company-specific events such as the failure of Astra’s rocket launch and doubt regarding Virgin Galatic’s profitability over its new ticket sale of space tours dragged the space subsector down.  On the other hand, the Russia-Ukraine war helped to proliferate the role of satellites and airbornes in modern national defense.  Maxar Technologies, which provides high-resolution satellite images over a battlefield, was the largest contributor and the top performer within the Space subsector.

S&P Latin America Equity Indices Commentary: Q1 2022

The Latin American pendulum has swung back from negative to positive returns in the past three months. The S&P Latin America 40 ended the quarter up 29.5%, its best Q1 performance since 1991. This is in stark contrast to other global equity markets, which ended in the red, with the S&P 500® losing 4.6%, the S&P Europe 350® down 7.3% and the S&P Emerging BMI down 6.5%.

Two years into the COVID-19 pandemic, most of the world seems to be turning the corner, despite different variants continuing to appear. However, the uncertainty of the ups and downs of the virus is still leaving many countries in a scrambled state. Added to this, the Russia-Ukraine conflict has caused major geopolitical and macroeconomic shocks—most notably by triggering a sharp rise in commodity prices, which has broadly supported the Latin American region's markets and economic activity. However, these benefits may ultimately be offset by some
economic and political risks, such as rising inflation, ongoing supply chain disruptions and newly elected governments coming into play.

Despite the existing political, economic and social environment, the markets greatly rebounded in Q1. So much so that on March 31, 2022, the flagship indices for Mexico and Peru both reached their all-time highs. The S&P/BMV IRT, which was launched on Oct. 30, 1978, with a base value of 0.7816, ended March 2022 at a record high of 83,810.9. The S&P/BVL Peru General Index, which was launched on Jan. 31, 1992, at a base level of 108.55, closed March at an all-time high level of 24,915.50. All the other Latin American markets' main indices also ended with positive returns. Latin American country headline indices had strong returns, which contrasted with the negative returns across other major global regions.

Which sectors were the biggest contributors to the regional performance? Based on the S&P Latin America BMI sectors, only Information Technology did poorly, losing 5.2% in Q1; all others had strong positive returns. Financials (35.0%) and Materials (32.5%) were the largest sectors by weight in the S&P Latin America BMI, and in Q1, they made the largest contribution to the total return of the broad regional index.

If we dig a little deeper, we can see that Latin American equity market gains were widespread. The S&P Latin America BMI gained 25.3% in Q1, with the index's top 10 constituents representing approximately 13.3% of the total return. Brazil's Vale S.A. (up 42.6% in Q1) was the largest contributor to returns, followed by Chile’s SQM (up 69.7% in Q1). Brazilian financial companies like B3 S.A. (up 65.2% in Q1), Itau Unibanco (up 52.3% in Q1) and Itausa (up 41.0% in Q1) also had a big hand in the pendulum's swing.

Despite geopolitical turmoil and market volatility throughout the world, Latin American equities had a great start to the year. The prospects of the region will be dependent on the development of the Russia-Ukraine conflict and on the economic and social policies each government implements throughout the year.

KEY HIGHLIGHTS

• The S&P 500^® was up 3.58% in March, bringing its YTD return to -4.95%.
• The Dow Jones Industrial Average^® gained 2.32% for the month and was down 4.57% YTD.
• The S&P MidCap 400^® gained 1.21% for the month, bringing its YTD return to -5.22%.
• The S&P SmallCap 600^® was up 0.18% in March and had a YTD return of -5.93%.

MARKET SNAPSHOT

March Madness marched on, as the S&P 500 scored a three-pointer, up 3.58% for the month and up 8.62% from its recent March 8, 2022 low.  While the month left the index off 4.95% for Q1 (and YTD; down 5.55% from the 2022 opening day closing high), the game continued under heightened interest rates (which now appear to be scheduled) and prices (which appear to be constantly increasing), as consumers continued to roar from the sidelines, with concerns that their voice (willingness to spend, compared to their ability to spend) may get sore (and threaten the score).

While the market was our monetary center of attention, the dominating news story issue was the continuation of the Russia-Ukraine conflict.  At month’s end, there were some positive signs that talks may lead to an end (but not immediately); the world has been changed, as likely will future planning, events and reactions.

As for the market fundamentals, earnings, sales, dividends and buybacks posted records for Q4 2021, while cash flow and cash resources fell short of records but remained impressive.  All 11 S&P 500 sectors were positive for the month (with 315 issues up and 81 up at least 10%), as the market traded past higher interest rates and inflation, with limited impact from the Ukrainian situation (though some attention is being paid to companies that may participate in an eventual rebuild).  The turnaround still left the YTD return down 4.95% (after 2021’s 26.89% gain, 2020’s 16.28%, 2019’s 28.88% and 2018’s -6.24%), as Energy stocks remained hot, up 37.66% YTD, with Utilities the only other sector in the black (up 3.96%).  Breadth was also negative, with 192 up and 94 up at least 10%, and 312 down, as 181 issues were down at least 10%.

April, which hopefully extends April Fool’s Day (up 67% of the time, compared with 52% for all days) to equity holders, is scheduled to focus on earnings, as over two-thirds of the issues will report by the end of the month, along with their updated guidance for 2022 (and the impact of inflation and supply issues).  Unscheduled is the Ukraine situation and politics, with the key question being consumers’ reaction to rising prices.

The S&P 500 closed at 4,530.41, up 3.58% (3.71% with dividends) from last month’s 4,373.94, when it was down 3.14% (-2.99%) from the prior month’s 4,515.55 close, when the index was down 5.26%
(-5.17%).  The index was down 4.95% YTD (-4.60%), and the one-year period was up 14.03% (15.65%); it was up 33.79% (38.35%) from its pre-COVID-19 Feb. 19, 2020, closing high.  The Dow^® ended the month at 34,678.35, up 2.32% (2.49% with dividends) from last month’s close of 33,892.60, when it was down 3.53% (-3.29%) from January’s close of 35,131.86, when it was down 3.32%
(-3.24%), and from December 2021’s close of 36,338.30, when it was up 5.38% (5.53%).  The YTD period was down 4.57% (-4.10%), and the one-year period was up 5.24% (7.30%).

The S&P 500 reversed course in March, as it adjusted to current and future events: Russia-Ukraine, seven possible interest rate hikes (with the potential of them not all being 0.25% each), and continued inflation—but potentially an end in sight (H1 2023).  For the month, the index posted a 3.58% gain, after opening the year with back-to-back declines (-3.14% and -5.26%).  Volatility decreased, as inflation concerns replaced COVID-19, and then global conflict replaced inflation, with inflation again ahead at month's end, while intraday volatility (high/low) averaged 1.70%, compared to February's 1.87% (January was 2.06%, as 2021 was 0.97%).  Since Biden won the Nov. 3, 2020, U.S. election, the index has gained 34.47% (37.30%), with 69 closing highs since his Jan. 20, 2021, inauguration.  The bull market was up 102.49% (108.96%) from the low on March 23, 2020.  The index closed 5.55% down from its Jan. 3, 2022, 4,796.56 closing high.

Q4 2021 earnings and sales have not just beat expectations (as they did in Q1, Q2 and Q3 of 2021), but they set new quarterly records.  For the quarter, 378 issues have beaten operating estimates (75.6%), with 102 missing and 20 meeting, as 389 (78.0%) have beaten on sales.  Q4 2021 posted a preliminary 9.0% increase over Q3 2021 and a 48.5% increase over Q4 2020.  For 2021, the year posted a 70.1% gain over 2020, with the 2021 P/E at 21.8, after 2020’s 22.1% earnings decline over 2019.

President Biden gave his State of the Union address, emphasizing his response to the Russia-Ukraine conflict and his plans to reduce rising costs, and he outlined progress on COVID-19 and current spending programs before Congress.