by Clare Market Investments on Mar 1, 2022
Monthly Market Summary
- The S&P 500 Index produced a -3.0% total return during February, underperforming the Russell 2000 Index’s +1.0% total return.
- For the second consecutive month, Energy was the only S&P 500 sector to post a positive return. Communication Services was the worst-performing sector during February as Facebook declined more than -30%, and Technology was the second-worst performing sector as rising yields continue to hurt Growth stocks.
- Corporate investment grade bonds generated a -2.1% total return, underperforming high yield bonds’ -0.9% total return.
- The MSCI EAFE Index of global developed market stocks returned -3.4% during February, outperforming the MSCI Emerging Market Index’s -4.3% return.
Global Stock Markets Decline as Geopolitical Tensions Rise in Europe
The stock market’s bumpy ride continued during February. Last month’s top news story was rising geopolitical tensions and Russia’s invasion of Ukraine. The headlines pushed the S&P 500 into correction, which is defined as a -10% or greater price decline. International equities traded lower as investor risk appetites declined due to rising geopolitical risk. In commodities, energy prices increased amid fears the geopolitical tensions would disrupt oil output and worsen an already under-supplied oil market.
Back in the U.S., markets prepared for the Federal Reserve to raise interest rates. The headline Consumer Price Index, which measures inflation, rose +7.5% year-over-year during January 2022. It was an increase from December 2021’s +7.1% and the fastest annual increase since 1982.
Treasury yields moved higher for a second consecutive month, an indication that investors expect the Federal Reserve to aggressively raise interest rates to ease inflation pressures. Rising yields led to a second straight month of negative credit returns and Growth stocks underperforming Value stocks.
Upcoming Federal Reserve Meeting Will Chart Course for Rest of 2022
The Federal Reserve will hold its March 2022 meeting March 15th-16th. It is widely anticipated the Federal Reserve will raise interest rates by one of two amounts ― either +0.25% or +0.50%. Although the 0.25% difference between the two options may seem insignificant, we believe the decision will chart the course for the remainder of 2022. If the Federal Reserve only raises the interest rate by +0.25%, investors may interpret the smaller increase as a sign the Federal Reserve will keep interest rates lower for longer, inferring economic growth will be less impacted. If the Federal Reserve raises the interest rate by +0.50%, investors may view the faster pace of interest rate increases as more likely to slow economic growth and potentially trigger a recession.
Increased Market Volatility is Here to Stay.
Even before the escalation in Ukraine, we saw increased market volatility as investors dealt with the prospects of higher interest rates. The war in Ukraine makes the trend of increased volatility more likely to continue. The Russian market has suffered as investors anticipate aggressive sanctions. The MSCI Russia index fell by more than -50% over the last few days ahead of the invasion. To the extent those sanctions have a more disruptive effect on global trade, the economic impact likely would not be limited to Russia. Inflation, already running at elevated levels, could show a further increase in the near-term, particularly in Europe. Energy markets, and supply chains more broadly, may see further disruptions that ultimately result in higher prices for consumers. Such a situation would put even more pressure on central banks to avoid a policy misstep as they look to tamp down inflation without causing a significant economic slowdown.
Markets Often Recover Quickly from Geopolitical Crises: A Quick History
While the war in Ukraine is certainly disruptive over the short-term, the fallout is not likely to become a protracted global market crisis. History can provide some perspective supporting this view. An analysis of 21 prior crises since 1940 shows that equity markets regained losses in an average of 37 days, albeit with a wide range from just 2 days to more than 150 days. Each of those situations was different of course, and the current backdrop of a global pandemic and the highest U.S. inflation in 30 years are testament to the unique challenges today. Global leaders have an incentive to avoid a broader geopolitical crisis, and hopefully coordinated sanctions on Russia and related diplomacy can be effective.
Volatility Can Present Opportunity for Long-Term Investors
Managing long-term assets for our clients, affords our firm the opportunity to take advantage of market volatility and price dislocations – not run from it. Accordingly, we are focused on areas of the market that have been hit the hardest, such as technology and the “new economy”. We have also been active in areas that could benefit from a punctuated market change toward higher interest rates and higher inflation. Examples include energy and commodity markets, “value stocks” that have been somewhat maligned over the last decade, and the “reopen” trade of companies most hurt most by the global pandemic. Given our expectations for ongoing volatility, we have not used the market’s recent drawdown to meaningfully increase risk (like we did after the outbreak of the COVID-19 crisis in 2020). Instead, we are trying instead to strike the right balance of diversification with strategic tilts toward the aforementioned areas of the market that we find most interesting.
Clare Market Investments, LLC is a Registered Investment Advisor. This material is for informational purposes only. It is not intended as and should not be used to provide investment advice and is not an offer to sell a security or a recommendation to buy a security. This summary is based exclusively on an analysis of general market conditions and does not speak to the suitability of any specific proposed securities transaction or investment strategy. Judgement or recommendations found in this report may differ materially from what may be presented in a long-term investment plan and are subject to change at any time. This report’s authors will not advise you as to any changes in figures or views found in this report. Investors should consult with their investment advisor to determine the appropriate investment strategy and investment vehicle. Investment decisions should be made based on the investor’s specific financial needs and objectives, goals, time horizon and risk tolerance. Except for the historical information contained in this report, certain matters are forward-looking statements or projections that are dependent upon risks and uncertainties, including but not limited to such factors and considerations such as general market volatility, global economic risk, geopolitical risk, currency risk and other country-specific factors, fiscal and monetary policy, the level of interest rates, security-specific risks, and historical market segment or sector performance relationships as they relate to the business and economic cycle. See claremarket.com for additional information and disclosures. © 2021 Clare Market Investments, LLC
“Never bet on the end of the World. It only happens once. And something that’s once in infinity is a long shot.”
- Art Cashin