April 2022 Market Commentary: Global Financial Assets Weaken Amid Renewed COVID Lockdowns Across China

Benjamin M. Lavine, CFA, CAIA, RICP
Chief Investment Officer, 3D

Data Source: Bloomberg

To read full market commentary, click here.

April 2022 Highlights:

  • After having rallied at the end of March, global stocks weakened in April and have reached ‘correction’ territory YTD 2022. Renewed COVID lockdowns across key Chinese port cities, notably Shanghai, and heightened prospects of central bank tightening drove much of the sell-off despite a decent 1Q2022 earnings reporting season by U.S. companies. In April, the MSCI All-Country World Index (ACWI) dropped 8.0% as global equity investors found few safe havens to shield them from the market downdraft.
  • Across major regions, MSCI Asia ex-Japan and Emerging Markets outperformed the other major regions in April, both returning -5.3% and -5.6%, respectively, followed by MSCI Europe (-5.8%), the U.S. (S&P 500 -8.7%), and MSCI Japan (down -8.8%). Japan underperformed due to a combination of slower export prospects (particularly across key Asian markets such as China) and a sharp sell-off in the Japanese yen as the Bank of Japan reaffirmed its commitment to quantitative easing despite inflationary pressures.
  • Within the U.S., U.S. smalls caps outperformed large caps, while value stocks (primarily driven by energy and materials) outperformed growth stocks, as the latter suffered from earnings disappointments from key tech bellwethers. The S&P 600 Index dropped 7.8% versus the -8.7% for the S&P 500. S&P Pure Value outperformed Pure Growth, returning -4.6% versus -13.5%, respectively.
  • April saw a flight to defensive sectors over cyclicals although only Consumer Staples ended up positive for the month across major sectors. The U.S. equity market was led by a combination of commodity cyclicals (Energy and Materials) and defensive sectors (Consumer Staples, Real Estate, Utilities, Healthcare) while Financials and Growth Sectors (Technology, Consumer Discretionary, Comm Services) lagged.
  • Among risk factors, High Dividend, Value, and Minimum Volatility Factors outperformed all other risk factors while High Quality and Momentum lagged, as the latter two factors largely captured this month’s underperformance of growth stocks.
  • Investment grade fixed income suffered from a rise in interest rates and wider spreads (higher borrowing costs relative to government debt) for both corporate debt and mortgage-backed securities (MBS). At one point during the month, the 10-Year U.S. Treasury Yield reached 3% before pulling back, having settled at 2.94% at the end of April. The Bloomberg/Barclays U.S. Aggregate Bond Index dropped 3.8% for the month. Non-U.S. bonds performed worst due to U.S. dollar strength as the Global Aggregate ex US Index returned -6.8%.
  • S. high yield marginally outperformed the broader fixed income market even though credit spreads widened (the lower interest rate sensitivity helped offset the rise in credit costs). The Bloomberg / Barclays US High Yield Index returned -3.6%, slightly outperforming investment grade fixed income, while Bloomberg/Barclays Emerging Market Debt Local Currency dropped 6.3% as investors pared back emerging market debt exposure in the face of a strengthening U.S. dollar and the ongoing Russia/Ukraine conflict.
  • Within equity alternatives, S&P GSCI Commodities Index returned 5.1% as oil prices remain elevated near $100/barrel even though April saw a pullback in industrial metal prices. It is notable that commodities performed well in April despite the COVID lockdowns across China, which led to a slowdown in commercial activity and in global shipping delays. The S&P GSCI Precious Metals dropped 2.7% as gold prices pulled back in the face of central bank tightening. The Dow Jones REITs Index returned -3.7%, outperforming the broader U.S. equity market.
  • Equity market sentiment will likely face a tug-of-war between the deteriorating macro backdrop (inflation, Russia/Ukraine, China COVID lockdowns) and U.S. earnings prospects as sellside analysts continue to raise their forecasts for earnings growth throughout 2022.

To read full market commentary, click here.