If the typical 401(k) participant will see a fourth consecutive year of gains, it will require making up for almost a 6% Q1 loss out of the gate.
After a relatively steady year of returns in 2021 and three straight years of positive returns, the Mid Atlantic Trust Company 401(k) Composite Benchmark started the year with a -5.78% return for Q1. The Benchmark’s performance in Q1 gave back all of the gains (and then some) that were realized in Q4 of 2021 when the typical 401(k) performance saw their 401(k) account increase by 5.47%. This performance reversal reflects the overall performance of the broader markets, which were hampered throughout the quarter amidst increased volatility brought on by rising interest rates, spiking inflation, ongoing supply-chain snarls, and the Russia-Ukraine war.
It has been a strong run for 401(k) participants over the previous five years. In four out of five years, the Mid Atlantic Trust Company 401(k) Composite Benchmark posted annual returns greater than 14%, with only 2018 providing a 6% negative return. For the hypothetical 401(k) investor*, even with the nearly 6% decline for the first quarter of 2021, that rate of return combined with an annual salary increase and a steady contribution rate means they would have nearly doubled their account balance during those five years.*
ABOUT THE MID ATLANTIC 401(k) BENCHMARK
Mid Atlantic Trust Company is a leading financial services organization that provides a wide array of brokerage, advisory, and trust services to a diverse national client base of financial advisors and institutions, asset managers, and benefits administrators through its various subsidiary companies. Because we provide these services, Mid Atlantic Trust Company has plan investment data on over 100,000 401(k) plans representing approximately $120 billion in assets. In response to requests from our institutional clients, we have created the Mid Atlantic Trust Company 401(k) Composite Benchmark. Using data from plans serviced by Mid Atlantic Trust Company with assets of at least $100,000 at the beginning and ending of the month, the Mid Atlantic Trust Company 401(k) Composite Benchmark is designed to reflect the portfolio performance across 401(k) plans serviced, in any capacity, by Mid Atlantic. See the “Methodology” section of this report for details on how the composite benchmark is calculated.
* For the hypothetical participant balances, we used a starting balance based on the average 401(k) participant balance provided by the Investment Company Institute for the Year of the starting balance. In our calculation, we assumed a starting annual salary of $50,000, a combined employee/employer 9% annual contribution rate, and a 3% annual salary increase and applied the monthly rate of return of the Benchmark.
Market Data as of Week Ending: 04/22/2022 unless noted otherwise
U.S. stock prices posted another weekly loss, reversing trend after a solid start to the week. The S&P 500 returned -2.74%, faring slightly better than the NASDAQ which fell -3.83%. With first quarter earnings now about 20% completed, an emphasis has been placed on companies’ fundamental strength amid high inflation. Currently 79% of S&P 500 companies have beaten net income expectations which is slightly above the five-year average. In what was a mixed bag, mid-cap companies held up slightly better their large and small company peers while value stocks continued to outperform their growth counterparts. Within sector performance, communication services pulled back the most as shares of Netflix fell more than 35% for the week. The energy sector declined significantly for the week as fear regarding Chinese economic activity and its implications on demand weighed on oil prices. The traditionally defensive consumer staples sector gained ground for the week. Developed foreign markets posted a negative weekly return but held up better than the U.S., while emerging markets trailed both.
U.S. Treasury yields continued their climb higher as concerns about inflation and the pace of interest-rate hikes drove the increase. The 10-year treasury reached its highest level in more than three years as it climbed as high as 2.95% before ending the week around 2.90%. Investment grade government bonds held up better than high yield and corporates while shorter duration fared better than long. Yields increased for both investment grade corporate bonds and high yield corporate bonds as they finished the week above 4.2% and 6.8%, respectively.
Economic data releases for the week were mixed. The NAHB home builders’ index fell two points in April to 77 as higher interest rates and buyer’s affordability weighed on home-builders confidence. Existing home sales fell 2.7% in March, marking the second consecutive month of declines. The Philadelphia Fed manufacturing index declined over four points to 17.6 in April, lower than consensus expectations. The preliminary S&P Global U.S. manufacturing PMI index for April rose unexpectedly to 59.7 while the S&P Global U.S. services PMI dipped to 54.7 in April, as new orders remained strong but rising labor and input costs weighed. Chinese markets slid as concerns grew over China’s economy as Shanghai remained locked down to combat rising COVID-19 cases.
Market Data as of Week Ending: 04/15/2022 unless noted otherwise
U.S. stock prices ended the holiday shortened week lower, led by the S&P 500’s return of -2.11%. A handful of companies kicked off earnings season which reported mixed results and weighed on investor sentiment as many are anticipating a sharp deceleration in earnings growth this quarter. In a reversal from previous weeks, small companies regained ground on their large company peers while value stocks continued to outperform their growth counterparts. Sector performance was mixed as materials, industrials and consumer staples were positive while information technology, consumer services and health care declined significantly. Energy moved slightly higher as the price of U.S. crude oil rebounded from two consecutive weekly declines and returned back above $100 per barrel. Developed foreign markets and emerging markets posted negative weekly returns, but were slightly better than the U.S.
U.S. Treasury yields moved higher after inflation data did little to change the expectation for aggressive monetary policy tightening. The yield curve steepened some last week as the 10-year treasury increased 12bps to 2.83% while the 2-year note dipped to 2.46%. Returns for the week were mixed across quality while shorter duration fared much better. Yields increased for both investment grade corporate bonds and high yield corporate bonds as they finished the week above 4.0% and 6.6%, respectively.
Economic data releases for the week left much to be digested. The NFIB small-business index fell to a one-year low of 93.2 in March as inflation weighed on sentiment. The Consumer Price Index jumped to 8.5% in March, the highest reading since 1981, as higher gas prices were a key component to the rise. Despite high inflation, U.S. retail sales rose by 0.5% in March marking the third consecutive monthly gain. The preliminary University of Michigan Consumer Sentiment Index for April rose to 65.7, showing unexpected improvement. The UK’s recovery is showing signs of weakening as inflation jumped to a 30-year high of 7.0% in March, weighing on GDP growth which slowed to 0.1% in February as construction and production output declined.
Market Data as of Week Ending: 04/08/2022 unless noted otherwise
U.S. stock prices ended the first full week of the quarter lower as investors brace for rate hikes and the start of first-quarter earnings season. The S&P 500 returned -1.24% for the week, erasing early week gains after the Fed’s mid-March meeting minutes revealed that policymakers were prepared to reduce the central bank balance sheet by $95B per month. Large companies generally outperformed their small company peers while the value style factor proved additive. For the second straight week, the typically defensive consumer staples, health care and utilities sectors outperformed, while information technology, consumer discretionary and communication services recorded steep losses. Developed foreign markets and emerging markets slightly underperformed the U.S.
U.S. Treasury yields moved higher after expectations for aggressive monetary policy tightening increased. The 10-year treasury jumped 34bps to 2.71% while the 2-year note rose to 2.52%, allowing the 2s10s spread some breathing room. Returns for the week were mixed across quality while short duration fared better. Yields increased for both investment grade corporate bonds and high yield corporate bonds as they finished the week above 3.9% and 6.5%, respectively.
Economic data releases were mixed during the light week. U.S. factory orders dropped for the first time in 10 months, dipping by -0.5%, but better than estimates. The ISM services index rose to 58.3% in March from 56.5%, signaling a faster expansion in the U.S. economy after it was slowed by Omicron earlier in the year. Initial jobless claims came in at a 54-year low of 166,000, well below the 200,000 that was expected and another sign of a red-hot U.S. labor market. U.S. consumer credit rose at its highest rate in 20 years to $42B in February, well above the expectations of a $15B gain. Investor sentiment in the eurozone dipped in April to its lowest level in almost two years while German factory orders fell sharply in February, reflecting a decline in foreign orders.
Market Data as of Week Ending: 04/01/2022 unless noted otherwise
U.S. stock prices ended the week relatively flat after inflation concerns and continued Russian strikes erased mid-week gains. The S&P 500 returned 0.08% for the week, closing out its best month since December but its worst quarterly setback since early 2020. Large companies generally underperformed their small company peers while the growth style factor proved additive. Typically defensive sectors in consumer staples, health care and utilities outperformed, while cyclically sensitive sectors in financial services and industrials lagged. Higher interest rate expectations were a headwind for the information technology sector as it posted a minor gain. Energy stocks slipped as oil prices fell below $100 a barrel as the U.S. announced it would release up to 180 million barrels of oil from a strategic reserve over the next six months. Developed foreign markets and emerging markets outperformed the U.S.
U.S. Treasury yields were mixed as the 10-year treasury fell to 2.39% while the 2-year note rose to 2.46%, this move marked the first yield curve inversion since 2019. The Bloomberg U.S. Aggregate Bond index finished out its worst quarter since late 1980, with March being the worst monthly performance for the index since July 2003. Returns for the week were mixed across quality and duration. Yields decreased for both investment grade corporate bonds and high yield corporate bonds as they finished the week at nearly 3.7% and 6.2%, respectively.
Economic data releases were mixed leaving investors to determine how aggressive the Fed will be. The U.S. consumer confidence index rose to 107.2 from 105.7, rising for the first time in 2022. Consumer spending rose 0.2% in February but was driven by rising prices. Personal incomes rose 0.5% in February as wages continue to increase, but not enough to offset the increase in cost of living. The PCE price index rose 0.6% in February, bringing the year-on-year increase to 6.2% – marking the biggest increase since January 1982. The U.S. added 431,000 jobs in March, slightly below the consensus estimates, but was offset by stronger than previously reported hiring in the first two months of the year. The unemployment rate fell to 3.6% from 3.8%. The ISM manufacturing index slipped to 57.1% in March, as factory activity stumbled to its lowest level in 18 months. Consumer prices in the eurozone rose to 7.5% in March as the war in Ukraine has sparked higher energy prices and rising inflation across the continent.