Skip to main content


The biggest macro event of the first quarter is Russia’s brutal invasion of Ukraine. While the human impact has been devastating and tragic—and our hearts and support are with the Ukrainian people—our job is to focus here on the economic and financial market impact of this event.

It was a rough first quarter across the board, with stocks, bonds, U.S., international, and emerging markets all hurt by rising interest rates, inflation, and the war in Ukraine. Global stocks (MSCI ACWI Index) fell 5.4% for the quarter. Among major global markets, the S&P 500 was a relative outperformer, dropping 4.6%, compared to a 5.9% loss for developed international markets (MSCI EAFE Index) and a drop of 7.0% for Emerging Market (EM) stocks. The relatively mild declines for the full quarter masked the intra-quarter volatility, where peak-to-trough declines were much larger.

Losses were larger in the U.S. core bond market than in the U.S. stock market. The benchmark Bloomberg U.S. Aggregate Bond Index fell 5.9% for the quarter. This was the second-worst quarter for the index since Q1 of 1980 when Paul Volcker’s Fed was aggressively tightening. High-yield bonds lost 4.5%, while floating-rate loans had just a 0.1% decline.


A period of rising inflation and rising interest rates creates challenges for both bonds and stocks, and in turn for a traditional balanced portfolio comprised only (or largely) of core bonds and stocks. The first quarter failed to offer a place to hide, resulting in losses for both conservative and aggressive investors.  Diversification into other asset classes, market segments, and alternative strategies can be particularly valuable in such an environment.

What steps have we taken to prepare for the environment?

We decided to underweight core bonds and allocate the proceeds to multiple sub-asset classes. In addition, inside our U.S. Equity holdings for clients in our sector rotation strategy, we rebalanced to a more defensive stance. We rotated out of the technology sector and added meaningful positions in energy and natural gas/oil.

In terms of our fixed-income allocation, our tactical positions in flexible, actively managed bond funds with shorter duration (average maturities) added value relative to the core bond index from which the positions are funded.

Our portfolio allocation to alternative investments (funded from core bonds) outperformed both the aggregate bond index and equity indices in the first quarter. Alternative exposure currently consists of managed futures, long/short equity, or private real estate.

On the downside, all major equity and bond indices sold off in the quarter. U.S. value stocks were the top performer, slightly in the red. Our foreign exposure was the largest detractor to performance. The decision to reduce foreign equity exposure several quarters ago helped mitigate the downside in the first quarter.


The war in Ukraine has had wide-ranging but diverse impacts on the global economy and individual regions. Besides Ukraine itself, the most direct and damaging economic impact is on Russia. Given that Russia’s economy is less than 2% of global GDP and that our portfolios had close to zero exposure to Russian stocks or bonds, it is immaterial.

However, Russia is a major producer and exporter of oil and natural gas—to Europe in particular, accounting for roughly 50% of Europe’s natural gas imports and 25% of its oil imports—and certain agricultural commodities and base metals. As such, the war and the sanctions imposed on Russia by the West are having, and for the foreseeable future will continue to have, a material impact on global economic growth and inflation.

In a nutshell, the war is a “stagflationary” supply shock: it fuels higher inflation via sharply rising commodity prices (especially oil) while also depressing economic growth via negative impacts on consumer spending. It is also triggering various government and central bank policy responses, which create additional risks and uncertainties for the economy and markets. In response to broadening and persistent inflation, the Federal Reserve has finally begun raising interest rates (the Fed funds policy rate).

On the more positive side, longer-term inflation expectations remain mostly “anchored” in a range consistent with the Fed’s long-term core inflation target. Short-term (12-month) inflation expectations have spiked higher, consistent with the recent sharp rise in gasoline prices and overall CPI, but over the medium-to-long-term expectations are that inflation will moderate. Should the longer-term measures move higher, we’d expect the Fed to accelerate its tightening pace.

We continue to assess how the Fed’s actions will impact the consumer and the broader economy. Our team is prepared to make additional changes if conditions necessitate further activity. Please reach out to our team with any questions.

Be sure to read the other articles featured in our April 2022 newsletter: