Q1 2022 Diversified portfolios were challenged by losses in both equity and bond markets during the first quarter as higher inflation, tighter monetary policy, and the Russian invasion of Ukraine triggered volatility. The S&P 500® Index entered a correction with a -12.8% decline through early March before rallying to finish the quarter down -4.6%. Bond prices fell sharply as interest rates shot higher amid rising inflation and a more hawkish policy response from the Federal Reserve (the Fed). The Consumer Price Index surged to a multi-decade high of 7.9% and worries over uncomfortably high inflation were snowballed by surging commodity prices caused by the military conflict in Ukraine and punitive sanctions placed on Russia. The unprecedented sanctions imposed severe economic damage to the Russian economy and its stock market while causing oil prices to surge to over $100/barrel.¹ U.S. economic growth accelerated faster than expected at the end of 2021 according to the Bureau of Economic Analysis’ estimated 6.9% annual GDP growth rate. Growth drivers included strong consumer spending, a build-up of private inventories, increases in exports, and higher residential fixed investment. The labor market continued to produce strong job gains with fewer claims for unemployment insurance and the unemployment rate falling to a pandemic-era low of 3.6% in March. The ISM Manufacturing Index continued to show robust growth in the manufacturing sector, ending the quarter at 57.1%, while the ISM Non-Manufacturing Index eased from very high levels to a still-strong level of 58.3% (a reading above 50 indicates economic expansion while a reading below 50 indicates contraction). The housing market remained solid with reports of robust new home sales and rising prices, but concerns over affordability are growing as the average 30-year mortgage rate climbed to 4.7%.² Throughout the quarter it became increasingly apparent that strong economic growth and high inflation would necessitate a more aggressive policy stance from the Fed. As expected, the Fed hiked rates by a quarter-point during its FOMC (Federal Open Market Committee) meeting in March, its first such hike in an effort to remove pandemic-era stimulus. The Fed also signaled potential increases at each of its six remaining meetings in 2022, which may also include half-point rate hikes. Fed funds futures markets are now pricing in the probability of the equivalent of eight additional quarter-point hikes through the end of the year. Tighter Fed policy Financial Markets Review First Quarter 2022 was met with skepticism about the Fed’s ability to engineer a so-called “soft landing.” In the press conference following the FOMC meeting, Chair Jerome Powell countered that “the probability of a recession within the next year is not particularly elevated.” Still, as the quarter ended, the Treasury yield curve inverted with short-term interest rates rising higher than long-term rates, often an early warning sign of an impending economic recession. Equities Stocks experienced their worst quarter since the pandemic-induced sell-off in the first quarter of 2020. All sectors of the S&P 500 were negative with the exception of the 39.0% gain in energy and 4.8% gain in utilities. Investors preferred value over growth as the Russell 1000® Value Index fell only -0.7% compared with the -9.0% drop in the Russell 1000® Growth Index. The higher growth sectors of communication services, consumer discretionary, and information technology performed the weakest with declines of -11.9%, -9.0%, and -8.4%, respectively. Corporate earnings growth is expected to slow in the first quarter as companies face a more difficult comparison against last year’s post-pandemic high water mark. According to Factset, S&P 500 companies are expected to have grown their fourth quarter earnings 4.5% in the first quarter, which would mark the lowest earnings growth since the fourth quarter of 2020. Small caps underperformed large caps for the fourth straight quarter with a -7.53% return for the Russell 2000® Index. International equities also faced a volatile quarter and were further impacted by the strengthening U.S. dollar. Foreign developed markets returned -5.9% for the MSCI EAFE Index. Emerging markets underperformed with a -7.0% return for the MSCI Emerging Markets Index, driven significantly by the declines of -14.2% and -56.9% in China and Russia, respectively. Fixed Income Sharply higher interest rates caused steep losses in the bond market during the quarter. The Bloomberg U.S. Aggregate Bond Index, a broad measure of investment grade bond market performance, sank -5.9%, marking the worst quarter since the 1980s. The yield on the 10-year U.S. Treasury rose from 1.51% to 2.34% through the quarter as the Fed’s rate hiking cycle got underway. The municipal bond market could not escape the treasury market volatility with a -6.2% return for the Barclays Municipal Bond Index. Investment-grade corporate bonds underperformed with a -7.7% return due to their longer average duration and widening credit spreads. Despite the risk-off environment, high yield corporates fell less than their higher quality counterparts due in part to their shorter average duration and higher yields. The Bloomberg Corporate High Yield Index returned -4.8% during the quarter. Agency mortgage-back securities (MBS) also modestly outperformed with a -5.0% return during the quarter. Lastly, foreign bonds lost -6.2% as measured by Bloomberg Global Aggregate ex U.S. Index. Each of us at AMG Funds appreciates the continued opportunity to assist you with your investing needs. 1 WTI, Cushing, OK 2 Freddie Mac national average 30-year fixed mortgage rate, Factset All investments are subject to risk including possible loss of principal. Past performance is no guarantee of future results. Please note that all performance data and comments are for the period from January 1, 2022 through March 31, 2022. Any sectors, industries, or securities discussed should not be perceived as investment recommendations. The views expressed represent the opinions of AMG Funds and are not intended as a forecast or guarantee of future results. The information and opinions contained herein are current as of March 31, 2022 and are subject to change without notice. Information has been obtained from sources believed to be reliable, but its accuracy, completeness, and interpretation are not guaranteed. The Russell 1000® Index measures the performance of approximately 1,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000® represents approximately 92% of the U.S. market. The Russell 1000® Value Index is a large-cap value index measuring the performance of the largest 1,000 U.S. incorporated companies with lower price-to-book ratios and lower forecasted growth values. The Russell 1000® Growth Index is a market capitalization weighted index that measures the performance of those Russell 1000® companies with higher price-to-book ratios and higher forecasted growth values. The Russell 2000® Index is composed of the 2000 smallest stocks in the Russell 3000® Index and is widely regarded in the industry as the premier measure of small-cap stock performance. The Russell 2000® Value Index is an unmanaged, market-value weighted, value-oriented index comprised of small stocks that have relatively low price-to-book ratios and lower forecasted growth values. The Russell 2000® Growth Index measures the performance of the Russell 2000® companies with higher price-to-book ratios and higher forecasted growth values. The Russell Midcap® Index measures the performance of the 800 smallest companies in the Russell 1000® Index, which represent approximately 25% of the total market capitalization of the Russell 1000® Index. The S&P 500 Index is a capitalization-weighted index of 500 stocks. The S&P 500 Index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. U.S. Long Government Bond Index tracks the market for U.S. dollardenominated, fixed-rate, nominal U.S. Treasuries and U.S. agency debentures. The MSCI World ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries excluding the United States. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. Please go to msci.com for most current list of countries represented by the index. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI China Index captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). Please go to msci.com for the most current list of countries represented by the MSCI indices. The Bloomberg Global Aggregate ex USD Index is a measure of investment grade debt from 24 local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. Bonds issued in USD are excluded. The Bloomberg U.S. Corporate High Yield Bond Index is a total return performance benchmark for USD-denominated, high yield, fixed-rate corporate bonds having a maximum quality rating of Ba1/BB+/BB+ or below, as determined by the middle of the Moody’s, Fitch, and S&P ratings. The Bloomberg U.S. Municipal Index covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and prerefunded bonds. The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investmentgrade fixed-rate bond market, including both government and corporate bonds. The Bloomberg U.S. Corporate Bond Index is an unmanaged index representative of publicly issued, SEC-registered U.S. corporate and specified foreign debentures and secured notes. Bloomberg®” and any Bloomberg index described herein are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the index (collectively, “Bloomberg”) and have been licensed for use for certain purposes by AMG Funds LLC. Bloomberg is not affiliated with AMG Funds LLC, and Bloomberg does not approve, endorse, review, or recommend the fund described herein. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to such fund. The Indices are unmanaged, are not available for investment and do not incur expenses. Investment advisory services are offered by AMG Funds LLC. AMG Distributors, Inc., member FINRA/SIPC.