Market Update March 28, 2022

Photo by Kamal Preet Kaur on Unsplash

Economic data for the week included a decline in durable goods orders and new home sales, and consumer sentiment fell to multi-year lows. However, jobless claims again reached multi-decade levels of strength.

U.S. equity markets gained ground last week, despite a more hawkish Fed; foreign markets were mixed, based on the relative impacts of high energy prices and the war in Ukraine. Bonds fell back sharply, as hawkish central bank language caused interest rates to drift higher in a variety of maturities. Commodities continued to gain across the board along with supply shortages, notably in energy and metals, due to the war in Ukraine and associated Russian sanctions.

U.S. stocks gained last week, with the Fed’s recently hawkish comments, combined with an uncertain outlook for Ukraine, resulted in mixed performance for stocks and bonds as markets digested the implications. By sector, energy stocks gained over 7% in keeping with oil prices, followed by materials and utilities. Health care and real estate came in the rear, with minimal change in either.

Fed Chair Powell’s speech to the National Association for Business Economics was watched more closely than normal last week. (Fed members give a lot of speeches.) It was especially noteworthy for its hawkish tone (moving from ‘steadily’ to ‘expeditiously’ raising rates), which caused yields to continue to push higher, as chances of a 0.50% hike once or more have risen. Speeches are a subtle tool, but fall within the ‘forward guidance’ playbook. If markets expect the Fed to move at a faster rate, some of the central bank’s work in tightening policy is already accomplished (at least for intermediate- to longer-term rates). Some of the more aggressive language is due to increasing consumer sentiment that inflation might be more persistent than first assumed—one of the Fed’s biggest challenges is inflation becoming ‘unanchored’ from their long-term target, which can begin to alter consumer behavior, as it did in the 1970s. However, economists still have little insight into what causes consumer inflation expectations to evolve the way they do (well, aside from prices themselves). Stock investors have generally cheered the more hawkish language, as an aggressive Fed that achieves lower inflation readings would be a positive for equity markets. The wrinkle is rising recession risk.

Foreign stocks were also mixed last week, with gains in the U.K. and Japan offset by a weaker Europe and emerging markets. The regional results are unsurprising, considering the proximity and Ukraine/Russia energy price impact on Europe. Emerging markets were mixed, as countries such as Brazil gained sharply along with higher world commodity prices, while China fell back with concerns over growth and a continued pandemic lockdown for a greater segment of the population.

U.S. bonds fell back dramatically last week, as the Bloomberg U.S. Aggregate declined nearly -2% (worse than many bad years in total). With a yield cushion, credit outperformed treasuries slightly, and floating rate bank loans were minimally changed in price. The reality of a tougher Fed, ready to fight inflation at the expense of other concerns, appeared to be a key catalyst in interest rates moving higher across the yield curve. In fact, the 5s-10s treasury slope is actually slightly inverted at this point, although the 2s-10s remains minimally positive, albeit narrower. (Market probabilities of a recession in the next 12 months don’t appear to be the base case, but they have certainly risen from very low levels.) Foreign bonds also fell back last week, not helped by a stronger dollar, in both developed and emerging markets. Interestingly, the Russian ruble recovered a bit on the week, with an announcement from Russia that foreign energy payments must be made in rubles—requiring foreign governments to reestablish ruble holdings (and boosting the currency in the process, as designed, in a way to circumvent the negative impact of sanctions).

Commodities gained several percent on the week, led by a double-digit increase in energy, while metals and agriculture also gained. The price of crude oil rose by over 10% to just under $109/barrel, with supply concerns not helped by pipeline disruptions and a separate drone attack on a Saudi fuel depot. Natural gas markets were affected by a potential deal between the EU and U.S. to provide LNG exports, although it won’t make up for the significant proportion of Russian production; prices rose nearly 15% on the week in keeping with continued supply uncertainty in the sector. Sentiment continues to be driven by persistent demand globally, although tempered a bit by the Chinese lockdowns, while supply is a large wildcard.

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.