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. Top of mind for most is the rising geopolitical tensions and Russia’s invasion of Ukraine. The S&P 500 was pushed into correction territory, which is defined as a -10% or greater price decline, before U.S. stocks recovered a portion of their losses. International equities also traded lower as investor risk appetites declined due to geopolitical risk. In the commodity market, energy prices increased amid fears the geopolitical tensions would disrupt oil output and worsen an already under-supplied oil market.
In terms of U.S. growth, recent monthly datapoints have shown the economy is still in growth mode, albeit at a lower rate than experienced in 2021. As a reminder, the year-over-year numbers from 2021 are exceptional due to the COVID-19 lockdowns which disrupted the economy in 2020. For example, according to the Institute for Supply Chain Management (ISM), its gauge of manufacturing activity for the month of February registered 58.6. Any number greater than 50.0 indicates “growth.” The February datapoint increased relative to January, but down dramatically from record high 65.0 published in March of 2021.
Before the geopolitical turmoil, 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. Wall Street analysts have a very wide range of interest rate increase forecasts for 2022 from 2 at the low end to 9 hikes at the upper end. The takeaway is investors will be watching the Federal Reserve’s next move very closely as it will set the course for the remainder of 2022.
Our Thoughts Moving Forward
Our thoughts and prayers go out to those impacted by the Russian and Ukrainian conflict. The situation between the two nations continues to evolve on an hourly basis, which, in today’s fast-paced trading environment, contributes to heightened equity and bond market volatility. We certainly hope for a peaceful and diplomatic solution. Some financial media pundits forecasted a quick end to the conflict and saw every market drop as a “buying opportunity.” Other media sources called the Russian invasion the beginning of World War Three. (Both of which have been wrong thus far).
For most investors, it’s quite difficult, if not impossible, to make your financial decisions on media prognostications for the impending future. Their “job” is to attract viewers and not necessarily to provide sound financial advice based on your personal circumstances. Throughout history, equity and bonds markets have not been insulated from experiencing dips along the road. Each time, the U.S. has recovered after dealing with each challenge – whether it be a global pandemic, trade wars, or a housing and technology downturn. While we understand the discomfort associated with seeing portfolio fluctuation in the short-term, we believe that staying disciplined and adhering to a long-term investment strategy should lead to a higher probability of reaching one’s goals.
As always, if you have any questions or would like to discuss your accounts or financial situation further, please call your advisor directly or email us at email@example.com.
Please visit our website at www.bfllc.com for more information on our planning services.