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Invariant Q1 2022 Letter

Executive Summary

  • Stock and bond markets experienced a serious correction in January and February but recovered some of those losses in March. Diversified portfolios were under pressure.

  • The price of oil, grains, and commodities broadly continued to rally on the Russia/Ukraine War.

  • The Federal Reserve has begun tightening monetary policy. Between this and the rise in crude oil prices, markets are reconsidering the trajectory of economic growth.


From all-time highs set in early January, the US stock market sold off about 15%. This was in particularly dramatic fashion as it occurred with a backdrop of war, soaring inflation, and seemingly endless domestic political strife.

They rebounded in March to finish down around 5% for the first quarter. Not great, but not nearly as bad as it looked in late February. Many growth stocks, technology shares, and international markets are down 50-75% from the highs set in February 2021. Thus far, what we have seen constitutes a serious correction.

Bonds usually provide support to portfolios during times like this. However, they were down more than stocks in the first quarter. As a result, diversified portfolios were under attack from both their growth and safety positions. This “nowhere to hide” type of market environment is rare and we do not expect it to last long.

This volatility gave us an opportunity to do significant tax loss harvesting. We also made some tactical adjustments across portfolios.


Invariant’s base case is despite significant headwinds and geopolitical risks, the US economy is on firm footing. Though our eyes are on headlines about Ukraine and soon the mid-term elections, high frequency indicators like Vegas gambling revenue and travel bookings in the US are off the charts. Household balance sheets are strong, and people are itching to get out and spend.

Despite this, economic and market sentiment is pessimistic. This could be a tailwind for risk assets if there is incremental improvement in the daily headlines about war and inflation.

(Source: Bespoke)

This has been our view for several months, so in this commentary we will focus on risks to that outlook.

There are several flashing yellow lights in the economy right now:

Surging Mortgage Rates

Interest rates on the 30-year fixed have moved from the low 3%’s to over 5% in the last few months. This will basically shut down refinancing activity, and further inhibit homeownership affordability. It will likely slow the pace of home price growth, and potentially lead to a correction in hotter markets. This all has significant tangential effects on the economy.

Gas Prices

Oil prices have surged from a low of $62.50/barrel in November of last year to $130/barrel at its peak on the back of the Russia/Ukraine War. According to AAA, the average price for gasoline hit a new high of $4.33 on March 13th, eclipsing the old high of $4.10 prior to the 2008 financial crisis.

If this trend continues, it will be a headwind for economic growth. However, analysts drawing similarities between now and 1973 are missing the dramatic difference in gas expenditure as a % of income and household net worth. While prices have skyrocketed, we do not believe they represent a true crisis for the consumer…yet. Should the most dire predictions unfold and oil jump over $200/barrel, our perspective will change. Unfortunately, a confluence of factors has led to chronic underinvestment in global exploration and production, contributing to price increases. Much like after the housing crisis of 2008, where we “underbuilt” homes for a decade, after the oil bust, companies have been much more reticent to invest in exploration and production. This is rational at a company level, and irrational on a sector level. That is how markets and cycles work. This means there is no quick fix to turning the taps back on. Yield Curve Inversion

The 2-10 year tenor of the yield curve has inverted. There are certain mitigating factors that have us categorizing this as a “yellow” instead of “red” light discussed here: (


The employment picture remains strong. Should it begin to deteriorate given the above, that will increase our concern about a recession in the near term. We are watching for a pick up in initial claims and the unemployment rate.

Food Prices

The UN Food and Agriculture Index is at all-time highs. Not only does this pose a threat to consumers’ pocketbooks, in countries where food is a higher percentage of overall income, this is usually a good leading indicator for geopolitical instability.

Federal Reserve

The Federal Reserve hiked interest rates for the first time since before the pandemic. It is poised to begin tapering its asset purchases in May and continue hiking rates on average once at every meeting for the rest of this year. The bond market expected this and has largely priced in these hikes. 2-year interest rates opened the year around 0.75% and have moved up all the way to 2.5%.

Curiously this cycle, while aggressive Fed tightening is priced in, and the yield curve inverts, real interest rates (nominal rates adjusted for inflation) are deeply negative. This real interest rate backdrop is usually stimulative for the economy and financial markets. Unfortunately, there is not much historical precedence for this, and we will have to wait and see which variables win out this cycle.

Russia Ukraine War We pray for a quick resolution to the violence in Ukraine. The war is barbaric and loss of life incomprehensible. With respect to financial markets, we must consider the short-term and long-term effects, as well as the geopolitical implications. In the short term, this led to an increase in oil prices as well as concerns about the availability of fertilizer and wheat. Long term, it will likely extend and potentially intensify some of the inflation that we are seeing, particularly in agricultural products. The financial sanctions the United States has put on Russia are unprecedented, and how Russia chooses to respond to here could also impact markets and the economy in unexpected ways. Conclusion Markets front-loaded the volatility we expected in 2022 in the first quarter. Invariant tax loss harvested and made modest allocation changes across models, but our base line forecast coming into the year remains intact. Namely, that the U.S. economy will continue on its growth path, with increasing volatility in inflation and financial markets. Please do not hesitate to reach out with any questions or concerns. Thank you for your trust and confidence. David M. Borowsky Chief Investment Officer


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