Economic Update 3-21-2022

• In economic news, the Federal Reserve raised interest rates for the first time in several years, by a quarter percent. In other data releases, retail sales and industrial production increased, as did housing starts, while jobless claims also came in better than expected. Producer prices continued their rise, and the index of leading economic indicators improved.
• Global equity markets rose last week with a tempering in commodity prices, a Fed that acted on the more tempered side, and rumors of progress in Ukraine-Russia peace talks. U.S. bonds fell back as interest rates ticked higher, along with hawkish Fed language. Commodities fell back due to concern over lower demand in China, due to Covid lockdowns.

  

U.S. stocks rebounded last week, to their best single week in over a year, seeming to look beyond the initial Fed rate hike and commodity price inflation exacerbated by the war in Ukraine. Nearly all groups were positive for the week, led by growth sectors consumer discretionary and technology, while energy stocks fell back by nearly 4% along with lower oil prices. Real estate also gained, despite the higher rates.

Foreign stocks fared positively, similar to U.S. equities, but helped a bit more by the weaker dollar. The Bank of England also raised rates from 0.50% to 0.75%, which was a slower pace than expected, in addition to more dovish language about ongoing hikes. Europe is obviously less hawkish than the U.S. Fed at this point. Emerging markets also experienced solid gains, with Russian equities now excluded form the index, led by a double-digit recovery in Chinese stocks, as additional economic support measures were announced. Stocks there had fallen back significantly, as Covid cases picked up sharply in several key cities, resulting in lockdowns, and an obvious lack of economic activity. Potential de-listing of Chinese companies from foreign exchanges due to lack of compliance with audit requirements remains a concern. Additionally, concern over China’s potential trade relationship with Russia, which could complicate sanctions activity, weighed on sentiment. However, markets rebounded quickly as the government appeared more open to lightening up on technology crackdowns. Questions continue to surround the potential for aid to Russia, which could benefit the Chinese (cheaper commodities), but alienate them from the West.

U.S. bonds declined again as investor digested the Fed’s aggressive stance to combat inflation, causing longer-term rates to rise. Interestingly, at the ‘belly’ of the treasury yield curve, the 5-year rate have now risen to meet the 10-year rate, and the curve itself continues to flatten. Corporate credit outperformed, as spreads again tightened, with high yield and senior floating rate bank loans earning positive returns for the week. Foreign bonds were mixed, with little change in developed markets, but strong recovery returns for emerging markets of nearly 3%, along with a weaker U.S. dollar.

Drama surrounding Russian sovereign bonds has continued, in terms of whether these will officially default (it appears they haven’t yet). While the funds appear to be available, political segmentation between ‘sanctioners’ and ‘non-sanctioners’ became an issue, as was the physical ability to transfer funds, given that Russia has largely been cut off from traditional payment networks like SWIFT. Russian bonds have also been removed from major indexes, now representing a very small market weight now that they’re trading for pennies on the dollar. Sovereign debt defaults can be damaging for nations seeking global funding down the road, which almost all countries do. Assuming sanctions are someday removed, a recent default could mean a lack of access to global markets altogether, or a prohibitively high interest rate demanded by investors. Neither are great options for an emerging market economy.

Commodities fell back to earth last week, with slowdowns in China threatening to weigh on overall global demand—creating the organic ‘demand destruction’ often needed to contain commodity prices. The price of crude oil fell back by -6% on net to just over $103/barrel, with industrial metals, precious metals, and agriculture down several percent as well. In addition to the Chinese influence, crude oil reacted to rising supply as the U.S. has engaged Iran and Venezuela in efforts to bring more crude online.

 

 

Period ending 3/18/2022	1 Week (%)	YTD (%)
DJIA	5.53	-3.89
S&P 500	6.19	-6.05
NASDAQ	8.20	-11.05
Russell 2000	5.43	-6.86
MSCI-EAFE	5.60	-7.26
MSCI-EM	3.50	-8.59
Bloomberg U.S. Aggregate	-0.39	-5.16

 

U.S. Treasury Yields	3 Mo.	2 Yr.	5 Yr.	10 Yr.	30 Yr.
12/31/2021	0.06	0.73	1.26	1.52	1.90
3/11/2022	0.40	1.75	1.96	2.00	2.36
3/18/2022	0.42	1.97	2.14	2.14	2.42

 

 

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. 

 

FOR ADVISOR USE ONLY – NOT FOR DISTRIBUTION TO THE PUBLIC WITHOUT PRIOR APPROVAL FROM YOUR RESPECTIVE FIRM’S COMPLIANCE DEPARTMENT

 

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