By Jason Teed Rising inflation and geopolitical concerns loomed large during the first quarter. Viewed by some as “transitory” in late 2021, inflation has persisted, rising to levels not seen in over 40 years. The Federal Reserve is expected to increase interest rates several times over the remainder of the year in an effort to manage inflation. These rate hikes will likely slow economic growth relative to where growth was at the beginning of the year. Slowing the economy is designed to bring the high inflation rates down in the future. In late February, Russia invaded Ukraine. The resultant broad and deep sanctions on Russia caused significant swings in the prices of commodities. Russia is a major supplier of oil and gas, particularly to Europe, and the conflict has called existing relationships into question. Ongoing geopolitical concerns have contributed to additional price inflation in commodities, beyond those associated throughout 2021–2022 with the domestic economy, that will likely trickle down to other goods. As a result, stagflation (high inflation and shrinking economic growth) is becoming a larger concern. Equities were down for the first quarter. The S&P 500 Index fell about 4.6% and the NASDAQ 100 Index dropped 8.9%. Emerging markets and developed international markets lost about 7.6% and 6.5%, respectively. Value stocks, which fell 0.1% for the quarter, significantly outperformed Growth stocks, which lost over 13%. Broadly, international stocks underperformed domestic stocks as geopolitical and supply-chain concerns continued to be a drag on global growth. All but two sectors were down for the quarter. Energy led performance, gaining nearly 40% as the price of oil spiked on supply concerns resulting from the Russian-Ukraine conflict. Utilities also performed well, up about 4.7%. This defensive sector tends to pass on costs to consumers. The Consumer Discretionary and Technology sectors were the laggards for the quarter. Their underperformance was likely due to geopolitical turmoil, as well as rising rates. These sectors are typically dominated by Growth stocks, which tend to rely more on debt to create growth than Value stocks. Safe-haven assets had mixed performance for the quarter. Gold rose about 5.7%, enjoying tailwinds from both high inflation and safe-haven behavior. Long-term Treasurys fell over 10%, responding strongly to the rising-rate environment. These asset classes will likely face headwinds in 2022 as interest rates are expected to keep rising. Overall, the shape of the yield curve flattened during the quarter. The yield curve represents the various interest-rate yields of different maturities of Treasury bills and bonds ranging from one month to 30 years. A flattening curve means that near-term maturities are yielding close to the amount the longer-term maturities are providing. And for some combination of maturities, the yield curve actually inverted (short-term rates exceeded long-term rates). However, the entire curve has shifted upward as rates have risen, particularly around 2-3 year maturities. This suggests the possibility of a recession in the coming months and slow growth in the longer term. Rates remain at relatively low levels, though the Federal Reserve is expected to raise rates even more aggressively this year starting in May. Higher rates put downward pressure on both equity and bond prices (bond prices are inversely related to rates), and companies will find it more expensive to grow through borrowing. The recent poor performance of almost all asset classes this quarter meant only about 7% of our strategies posted quarterly gains, though about 55% of our strategies outperformed the S&P during the period. Our top performers were mostly strategies that actively trade into and out of conventional asset classes, as well as those that can rotate into broader alternative asset classes. The quarter was challenging for aggressive tactical equity strategies, which tend to falter early in a market correction when the market fails to show a clear trend. It was a difficult quarter for the bond market as well. Aggregate bonds fell 5.9% for the quarter, while long-term Treasurys fell 10.6%. In general, our fixed-income strategies fared better, most offering greater capital protection than their benchmarks. On the whole, these strategies offered significant protection against the current rising-rate environment.