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Market Volatility is Back... With Few Places for Investors to Hide

Fixed Income Perspectives for the First Quarter of 2022 Financial markets experienced one of the most volatile periods in years during the first quarter of 2022, even when compared to the dramatic moves as the Covid-19 shutdown unfolded. Spanning equity, commodity, and bond markets, investors found few places to hide. However, after experiencing this rapid repricing, there are reasons to be optimistic going forward.

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Temporary disruption or seismic shift?

Equity Market Perspectives for the First Quarter of 2022 Over 15 months ago, in one of our year-end letters summarizing 2020, we mentioned how so many events were packed into the year; it felt like we experienced a decade’s worth of macro-economic and geopolitical events in one year, including but not limited to, a pandemic, 1960s-style social unrest, a disputed political contest, and extremely volatile stock markets. To that list, we can now add a war involving a major global power.

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Quantitative Tightening vs. Easing

In the fourth quarter of 2021, with the backdrop of increasing inflation, the Federal Reserve (the “Fed”) began the process of withdrawing its monetary support for the U.S. economy. The most delicate element of the plan is likely to be shrinking its record balance sheet (currently about $9 trillion) – something that ended up roiling financial markets the last time policy makers did it.

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High Quality Fixed Income Investing in Today's Environment

Traditionally, high quality fixed income has played three important roles in an investor’s asset allocation: a steady source of safe income, principal preservation, and risk reduction through diversification. Today, due primarily to massive Government intervention in the credit markets, one of those pillars has been weakened – income.

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Financial Markets Evince Risk-Seeking Behavior

Remember when 2021 was supposed to be a return to normality? Instead, it has been a transition year featuring high inflation and the ongoing coronavirus pandemic continuing to disrupt regions across the world, especially as new variants emerge such as Delta and Omicron.

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Style Divergence Between Large Caps and Mid/Small

There is a big divergence in growth versus value occurring between large caps and mid/small. With valuations stretched and an uptick in volatility, could the pendulum finally swing for large caps as well?

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Corporate Bond Risk Measures Nearing All-time Highs

As if low interest rates and tight credit spreads weren’t enough to challenge fixed income investors in this market, the pool of investment grade corporate bonds seems to be getting riskier as well. The Bloomberg U.S. Corporate Index, which measures the investment grade, fixed-rate, taxable corporate bond market, and serves as a proxy for the U.S. credit market, now has an average duration of 8.78 years – nearly the longest it has ever been (98th percentile)1.

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