The year got off to a volatile start, as the first quarter saw inflation running hotter than it has in nearly 40 years, investors frantically sorting out the winners and losers of rising prices, and the Federal Reserve attempting to play catch-up by raising short-term interest rates.
The first Federal rate hike since 2018 had an immediate effect — further flattening the yield curve, which investors have historically viewed as a sign of a potential economic slowdown ahead. By the end of the quarter, last year’s worry that the economy may be overheating was replaced by fear that the economy might soon stall, redoubling the market’s recent focus on traditional defensive sectors such as Utilities, which turned out to be among the few areas of the Russell 2000® Index that posted gains in the first quarter.
The markets acted in other expected ways. Sectors that tend to benefit from inflationary pressures, such as Energy, Materials, and Financials — which lean value — outperformed the broad market. At the same time, growth-leaning sectors that tend to suffer when inflation rises — or when rates are hiked to combat inflation — underperformed. This group included Information Technology, Consumer Discretionary, and Health Care, sectors that are generally regarded as long-duration equities, meaning the bulk of their cash flows are expected in the distant future, making them more vulnerable to the effects of high inflation.
All of this served to reinforce value’s advantage versus growth, a trend that began to take hold last year.