March 2022 - Market Update

Data Dashboard

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Stock Market

Stocks reversed recent trends in March, recouping some of the decline observed since the start of the year. The Fed’s transparency about their plan to bring short-term interest rates back to “normal” levels brought on the initial volatility in January. Companies with significant earnings growth expectations took the hardest hit stemming from the effects of higher discount rates in their valuations. This is the opposite effect than many growth stocks received from years of ultra-low interest rates.

With the first quarter now behind us, earnings reports will provide fresh information on how companies are navigating elevated inflation rates, as well as the state of consumer and business spending. Analysts are still relatively bullish on corporate fundamentals, although we can expect earnings calls to contain hard-hitting questions about the sustainability of margins in the face of rising prices. CEOs may have some wiggle room if their companies have been affected by the war in Ukraine.

Year to Date Returns (by US Sector)

Bond Market

Prices are falling in the bond market, with the 10-year yield up about 0.50% (from 1.8% to 2.3%) on the month. As we end the month, there has been enhanced focus on the shape of the yield curve and what it means for the economy. Short-term borrowing rates are rapidly rising in conjunction with tightening Federal Reserve policies. Longer term interest rates (10 year through 30 year) are not rising as quickly causing the curve to flatten and potentially invert.

In a much-anticipated move, the FOMC (the Federal Reserve’s policy making committee) finally raised its benchmark interest rate 0.25% on March 16th for the first time since 2018. Raising this key rate effectively increases the cost of borrowing and serves as a tool for the Fed to attempt to quell price inflation. In the meeting statement, Fed officials also indicated that six increases would be likely by year end in addition to removing the repurchasing of Treasury, mortgage and agency debt which also have the effect of increasing yields on those securities. While all of these moves were anticipated and priced into the market, recent statements by Fed officials have indicated that the committee is considering more aggressive action with 50 basis point increases instead of the more typical 25bp moves to combat ever-growing inflation. As a result, bond yields are hovering around the highest levels we’ve observed in three years.

Economics

With the Omicron variant in the rear-view mirror, employers are ramping up hiring. With prices in the economy increasing, more Americans should be willing to work which should ease the labor shortage. Inflation is being led by energy prices and housing, threatening the pace of consumer spending that has been the driving force behind the post-lockdown expansion. As we have highlighted recently, many consumers are still in a good fiscal situation and can weather inflation (for now).

The Fed is now in inflation-fighting mode. Lifting the benchmark interest rate at the right pace will be a balancing act; too slow and inflation could get out of hand, too quickly and the economy could face a recession. At the right speed, the Fed hopes to create a “soft landing” where inflation and growth rates simmer down to more reasonable long-term rates.

Tactical Updates

For the month of March, our Tactical Portfolios realized significant gains in Materials and Oil while cutting losses in Mexico and Airline equities. We kept oil exposure by purchasing holdings in companies that benefit from the transportation, storage, and processing of energy commodities. We have exposure to other commodities via Brazil equities, and other materials such as Gold, Silver, and Copper. Additionally, we closed the month with exposure to Aerospace & Defense, and Utilities. With a heavy tilt towards commodities and materials, we are positioned for general inflation protection, but are keeping a cautious eye for any ease to input cost pressures.

As for the Low Volatility model, we are wholly invested in short-term Treasury Inflation Protected Securities (TIPS) as the majority of the fixed income universe continues its negative trend into April.

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.

The tax deadline is upon us! We have spoken to many of you about upcoming tax obligations. Please let us know if you will need us to manage your cash position differently leading up to the 2022 tax deadline. As a friendly reminder, cash typically becomes available two days after trades are executed.

Thanks,

Ryan Wheeler

Chief Investment Officer

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