March Market Insights – Markets Gain Ground Amid A Tough 2022


Tuesday, April 5, 2022

Index Performance

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U.S. and International Equities

Most equity markets worldwide gained ground, reversing two straight months of declines. The present geopolitical tensions in Eastern Europe have added to the market’s “wall of worry”. This on top of inflation concerns, along with corresponding Federal Reserve monetary policy, caused markets to get over-pessimistic. Thus, buyers took advantage of marked-down equities. Solid gains were seen throughout the major U.S. equity indexes in March.

Emerging markets lost ground for a second straight month on the back of Russian sanctions as well as concerns over an increase in COVID-19 cases in China. Investors showed concern over the potential effect that lockdowns might have on the Chinese economy.

Almost all sectors gained ground in March. A major bright spot continues to be the energy sector, which returned 9% for the month. The sector continues to ride on the back of higher oil and gas prices given the heightened tensions between Russia and Ukraine. Utilities and real estate were also top performers as well. Investors sought out both sectors for their potential to handle the damaging effects of inflation.

Commodities Higher

Both oil and natural gas finished higher in March. Oil’s fundamental case continues to improve due to higher demand, improving economic conditions, and fears of drawn-out supply disruptions from a the Russia-Ukraine conflict. The major metals, gold, silver, and copper, gained ground for the second straight month on geopolitical tensions as well as negative real interest rates.

Fixed Income Continues Lower

The benchmark Bloomberg U.S. Aggregate Index finished lower for the third straight month following negative returns for 2021. Market participants continued to sell off bonds in light of the Federal Reserve’s hawkish sentiment in the face of high inflation. High yield bonds (Bloomberg High Yield Index), which were a bright spot in the fixed income space during 2021, have been negatively impacted by expected higher interest rates as well year. Although, credit conditions remain benign. Both developed international bonds (Citigroup World Government Bond Index) and emerging market debt (JP Morgan Emerging Markets Global Bond Index) also lost ground for the third straight month.


U.S. Economic Data Recap

Inflation: February’s Consumer Price Index (CPI) was reported at almost 8% year over year. This was in line with economists’ expectations; however it was the highest print reported since early 1982. Core CPI (excluding food and energy) rose almost 6.5% year over year. This reading was in line with economists’ expectations. High inflation reflected ongoing supply challenges in the face of continuing strong demand as well as the increase in energy prices.  Energy prices started to spike towards the end of the month as concerns over the Russian invasion of Ukraine rose.

The Producer Price Index (PPI) increased as supply constraints lingered, leading to its largest annual gain since the series was updated over 10 years ago. For the 12 months through February, PPI increased 10%, tying January for the largest gain ever. Core PPI, excluding food, energy, and trade services, increased over 8% year-over-year.

U.S. consumer:  The Conference Board’s March Consumer Confidence reading inched higher from last month’s 12-month low and surpassed economists’ expectations.  Presently, consumers are facing the highest inflation readings in 40 years. However, given record-low continuing claims and strong job numbers, consumers, for now, appear able to weather the current economic climate.

Retail sales:  February Retail Sales missed economists’ expectations. In addition, according to the Labor Department, consumer spending came in well below the increase in prices as Retail Sales numbers are not adjusted for inflation.  The largest decline in retail sales came from online shopping, which declined by almost 4% month-over-month.

U.S. home sales: U.S. new home sales declined in February. This represents a second straight month of decline, suggesting that relatively high prices and rising mortgage rates could be keeping prospective buyers away from the market.  This being said, the median sales price of a new home increased over 10% in February from a year earlier to over $400,000.

Small business sentiment: The National Federation of Independent Business (NFIB) Small Business Optimism Index fell to another 12-month low in February amid persistent worker shortages and higher prices for materials. In addition, more than a quarter of businesses cited inflation as their largest problem, the highest since 1981. The themes of scarce workers and rising labor costs remain the main areas of worry for businesses.  Both subject matters have been issues for small businesses since the early part of last year.

Federal Reserve news:  The Federal Reserve (Fed), during the March Federal Open Market Committee (FOMC) meeting, voted to increase the fed funds rate by 25 basis points (0.25%).  In addition, the Fed signaled that further rate increases were appropriate. In addition, the “dot plot” was released, which provides the individual member’s projections on the future path of interest rates. As of the March meeting, the median dot of the Committee, in aggregate, reflects seven interest rate hikes in total in 2022.  This is an increase from three hikes just three months ago.

In addition, the Fed now forecasts 2.8% GDP growth in 2022, which is a decline from their prediction of 4.0% in December. These lower growth expectations come amid higher inflation expectations with personal consumption expenditures (PCE) headline and core metrics, the Fed’s preferred inflation measures, now up to 4.3% and 4.1%.  This is an increase from 2.6% and 2.7% in December, respectively.

U.S. employment: The U.S. economy added over 430,000 jobs in March. In addition, February job estimates were revised higher, pushing the three month average gain to over 560,000. Unemployment ticked down to 3.6 percent, indicating a tightening labor market. Participation rates improved, increasing to 62.4 percent. That being said, it is still a full percentage point below pre-pandemic levels.

Looking ahead

As we continue through the economic recovery, battling through the remnants of COVID-19, the present geopolitical struggles in Eastern Europe has investors concerned about the global economic output. On top of this, inflation is proving stickier than many anticipated. The Fed’s hawkish view, along with the bond market, has affirmed this.

Market participants are presently weighing the effects of all these factors, leading to higher volatility in financial assets. Presently, amid these challenges, S&P 500 Index company fundamentals appear intact. This being said, Q1 earning reports will provide a clearer view of company as well as supply-chain fundamentals.  Our base case continues to be that inflation should begin to stabilize once supply chains are fully operational and labor shortages ease. In addition, in our view, the health of the consumer should continue to be an important driver for the economy and corporate profits in 2022.




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