Market Update April 4, 2022
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Economic data for the week included minimal revisions to prior-quarter U.S. GDP growth, and a slight decline in the pace of still-positive ISM manufacturing sentiment. Housing prices continued to rise at a solid clip, while labor markets continue to demonstrate a recovery, notably in nonfarm payrolls for March.
U.S. equity markets were little changed on net, and were outshined by gains in foreign markets. Bonds gained ground to end the quarter, as interest rates fell back from highs. Commodity prices fell back, led by energy, along with a potential increase in crude oil supply from government reserves.
U.S. stocks were mixed last week, based on a variety of similar cross-currents. Gains were solid early, as hopes for progress in Ukraine-Russia peace discussions resulted in a rise in a sentiment, although the seriousness of talks seems debatable, based on the opinions of some experts. As it stands, Russia has intensified their focus on Eastern Ukraine, mentioning a possible North Korea/South Korea-like separate state scenario. This offers Russia the desired buffer on its western flanks from NATO, capture of desired energy reserves, as well as a face-saving retreat from the disastrous war performance in Ukraine’s core region.
By sector, defensive utilities, health care, and consumer staples saw decent gains for the week, while ‘value’ financials, industrials, and energy lost ground by a few percent each. Real estate also gained, due to its defensive reputation, but also a fall in interest rates.
Foreign stocks were mixed to positive last week, helped by a weaker dollar. Europe and emerging markets gained ground, which offset declines in Japan. In EM specifically, several key countries saw substantial gains, as strong commodity markets and less expensive valuations have enticed investors.
The lockdown of the city of Shanghai over the prior weekend is significant, with its important from a global trade standpoint. It appears China’s zero-Covid policy won’t be abating any time soon, as they work to either develop or import mRNA vaccines on par with the West, although the policy has lightened up a bit in terms of semantics and tracing of cases.
U.S. bonds gained on the week, as interest rates fell back from recent highs. Investment-grade corporates outperformed treasuries, as spreads again tightened. Emerging market debt in particularly benefited from a weaker dollar. As it stood, U.S. bonds experienced their worst single quarter (Bloomberg U.S. Aggregate down -6%) since 1980, as interest rates rose across the curve.
The treasury yield curve, at least as defined by the 2-year/10-year slope briefly inverted last week, which again raises questions about recession risk over the next 1-2 years, per its historical relationship. However, the 3-month/10-year curve has not come close to inversion. (There seems to be a split in the economist/strategist community as to which slope measure is most preferred; usually, they show very similar metrics. In the current case, the 2-year treasury reflects expectations of a Fed tightening policy multiple times over the next few years, while the 3-month is a better gauge of today’s conditions.) This will again be likely a closely watched relationship this year, with this barely qualifying as a real inversion so far. We often start seeing cries of, ‘It’s different this time,’ which itself should always be viewed with suspicion. Historically, on average, stock returns have continued to be positive a year or even two beyond 10y-2y inversions, although each situation is unique.
Commodities fell back sharply last week, primarily in energy, but also agriculture to a lesser degree, and metals. The price of crude oil fell back by nearly -13% to just over $99/barrel, as the White House announced additional releases from the Strategic Petroleum Reserve, in an effort to boost supply and ultimately lower gasoline prices. Gas prices, even more than crude, have made energy price inflation even more tangible for most consumers. While politically seen as a positive, releases (of which there have been several dozen over the years) might only be a temporary fix for deeper structural hurdles in replacing prior Russian supply.
Sources: LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.