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April 2022

Equity Markets Correct in First Quarter

Key Points


Valuations more attractive for Core Equity holdings


Rising rates, aggressive Fed, geopolitical uncertainties hit markets


Fundamentals remain solid for companies in our strategy

After a very strong 2021 for the S&P 500 and for our US Core Equity strategy, we were expecting a corrective process for the markets and a period of relative underperformance to occur.

The combination of rising interest rates, a more aggressive Fed and geopolitical uncertainties combined to produce negative returns in Q1 for equities on a global basis. During Q1 the US Core Equity strategy declined 8.9%, underperforming the S&P 500 by 3.9%.

There were three reasons for this. The first was our style tilt. Foundational to our success over many years has been our emphasis on quality companies. After outperforming strongly in 2021, quality stocks underperformed as the market shifted to lesser quality and more cyclical stocks. The MSCI Quality Index was down 9% in Q1, matching our strategy. The second was stock selection. Some of our biggest 2021 winners experienced corrections that were driven by valuation compression. Fundamentals remained solid. Sherwin Williams (SHW), Home Depot (HD), Charles River Laboratories International (CRL), Zoetis (ZTS) and Trane Technologies (TT) were up 49% on average in 2021. In Q1, these stocks declined 20% on average and accounted for 63% of the underperformance. The rest of the underperformance was driven by a meaningful underweight in energy, which we have since reduced.

With the underperformance in Q1, valuations of our holdings have become more attractive. Our price earnings growth level compared to the S&P 500 at the end of December was 1.26x and now stands at 1.17x, a level that is more in line with our higher quality rank. As illustrated, Core Equity maintains a solid premium to the S&P on key quality metrics such as revenue and earnings stability and cash flow conversion. This enhanced valuation, along with steps taken to reduce our exposure to Europe, enhances the outlook for the strategy. For the long term, we believe our focus on quality companies will continue to drive outperformance.


Indices are unmanaged, and one cannot invest directly in an index. Index returns do not include fees for trading costs (i.e., commissions) or any fees charged by your financial advisor, custodian, City National Rochdale or other third-party managers, and if they were included would reduce the returns.

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