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More Blog PostsFeburary 2022 - Market Update
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Key Observations
Stocks continued their decline in February (-4.2%) as the world reacted to the Russian invasion of Ukraine. Volatility increased and investors flocked to safer ground while they waited to see if Putin would march troops into Russia’s neighbor and how the West would respond. Russia quickly escalated the situation into a full-scale military invasion but its hopes for a quick takeover of Ukraine were quickly dashed as Ukrainians have proven a more resilient force than anticipated.
The US and its allies have enacted severe trade and financial sanctions on Russia and its oligarchs while the private sector around the world has rushed to divest Russian assets and terminate partnerships, many of which could lead to significant decline in revenue. The response from the US and EU countries has done little to dampen the Russian advance and the situation in Ukraine is deteriorating. In terms of financial repercussions, these moves have so far produced a major spike in oil, halted the Russian stock market, and caused the Russian Ruble to tumble, but as of this writing, the impact to US and western financial markets has been somewhat contained. The S&P 500 is surprisingly flat since the start of the invasion, with the entirety of the broad market decline occurring prior to the invasion. It remains to be seen how the ongoing impact of the sanctions and shedding of Russian exposures across the globe will have on overall growth and equity indices as well as individual companies with high Russian exposures.
Meanwhile, expectations for the path of monetary policy have shifted toward faster and larger interest rate increases geared toward combatting inflationary pressures. Broad US Stocks ended the month down 10% from the highs, flirting with that support line for the last few days. Oil continued its impressive rally, making Energy the only sector with positive returns for the second month in a row.
Data Dashboard
Stock Market
US stock prices declined based on the increased expectation for near-term interest rate hikes and the war in Ukraine. Investors’ fears of how the US would approach Putin’s action and how sanctions would affect global trade weighed heavily on stocks. At the same time, inflation fears remain high leading to expectations for higher interest rates.
Stocks at the end of February were 9.9% from the high achieved in December. Volatility is elevated, meaning we are seeing larger daily swings than the average. Investors are on their toes waiting for news from Eastern Europe, and will be hanging on every word from global leaders. We expect stocks to continue to jump around while the theater in Ukraine unfolds.
Once again, Energy was the winning sector in a sea of red. Oil prices added value to energy producers in the US, particularly the oil drillers and transporters. Growth sectors felt the most pain in February, including Consumer Discretionary, Real Estate, and Tech.
Year to Date Returns (by US Sector)
Bond Market
The Bond market was also down in February, exhibiting a positive correlation with stocks for a second month in a row. The yield curve had competing forces; flight to quality given equity volatility and the forecasted acceleration of Fed monetary policy changes. Bonds with exposure to credit had a double whammy. Higher short term interest rates and fears about a potential geopolitical impact on the economy could push the yield curve to “invert”, meaning that the longer-term bonds would have lower yield than short-term. An inverted yield curve does not always signal an upcoming recession, but it does indicate an expectation of future declines in short-term rates and a willingness to accept less for longer-term safety.
Economics
Domestic economic reports continue to tell the story of a strong economy with rising prices and a tight labor market. Inflation in January (reported Feb 10) was 7.5% when you include Food and Energy. Oil prices have skyrocketed as current and planned sanctions on Russia threatened a significant level of global oil supply. The US gets about 3% of its oil from Russia, which could be replaced by Middle-Eastern or domestic production.
Oil shocks can have a major effect on consumers as prices flow down to the gas pump. A report by JP Morgan recently pointed out that the US consumer has built a significant excess savings cushion during COVID, reducing the risk that higher oil prices will change consumer behavior in the short-term. Higher energy prices could also incentivize US drillers to ramp up supply at a faster pace and export more supply to Europe in place of Russian oil and natural gas.
Tactical Updates
With respect to recent downturns in the broader market, our Tactical portfolios have continued to outperform on the year with strong trades in February. During the past month, we closed out of 15 different positions, locking in a positive average alpha per trade (compared to ACWI, the Tactical Portfolio’s benchmark). As we currently stand in our Tactical portfolios, we have a small foreign exposure in Brazilian equities and remain primarily invested in US domestic equities. In addition to Consumer Staples and Materials, we have exposure to Gold Mining, Oil, and Airlines.
As for Fixed Income, we closed out of TIPS and high yield corporate bonds, locking in some long-held gains and entered into floating treasuries notes and emerging markets bonds. With rising interest rates and decreasing overall bond prices, we increased our total holdings of the short-term floating notes in search of better entry points for other fixed income securities.
General Client Considerations
Market volatility can cause anxiety and fear as you may see your portfolio values decrease and general volatility increase. It might be tempting to sell some of your positions and wait until the market cools off before getting back in.
But before the temptation sets in, it’s important to remember that market downturns like this one were incorporated into your ongoing risk tolerance. It is not “part of the plan” to sell at these lows and lock in losses. If you have any concerns about market risks or financial impacts that the current volatility may have regarding your financial situation, we are always here to be used as a helpful resource!
Thanks,
Ryan Wheeler
Chief Investment Officer