Equity markets sold off this week, with indices finishing down across the board. Fear seems to have spiked recently, as this marks the third consecutive week of declines. While it’s difficult to pin down an exact cause, a swarm of negative geopolitical movements as well as economic concerns seem to be prevailing. The Omicron variant appears to be at its zenith, inflation continues to rise, and the Kremlin continues to threaten Ukraine. Long term however, all of these issues should fade. In spite of the less-than-stellar news this week, the economy is still recovering well from pandemic lockdowns. The biggest threat to the economy remains inflation, and the Fed now appears to be taking the threat more seriously.
Overseas, developed markets underperformed emerging markets, with both indices returning negative performance. European indices were negative, while Japanese markets returned negative performance as well. Improving prospects against the pandemic as well as improved prospects for economic recovery should continue to help lift markets globally over time, but macroeconomic factors such as inflation and supply shortages continue to pose challenges.
Equity markets were negative this week as investors continue to assess the state of the global economy. While fears concerning global stability and health overall appear to be in decline overall, the recent volatility serves as a great reminder of why it is so important to remain committed to a long-term plan and maintain a well-diversified portfolio. When stocks struggle to gain traction, other asset classes such as gold, REITs, and US Treasury bonds can prove to be more stable. Flashy news headlines can make it tempting to make knee-jerk decisions, but sticking to a strategy and maintaining a portfolio consistent with your goals and risk tolerance can lead to smoother returns and a better probability for long-term success.
Chart of the Week
Your daily cup of Joe may get more expensive, as supply side problems continue to hound the world's largest coffee exporter. Arabica coffee bean prices have more than doubled in the last year as supply chain problems plague the coffee industry in Brazil.
Market Update
Equities
Broad market equity indices finished the week down with major large cap indices outperforming small cap. Economic data has been mostly encouraging, but the global recovery still has a long way to go to recover from COVID-19 lockdowns.
S&P sectors were negative this week. Utilities and consumer staples outperformed, returning -0.79% and -1.52% respectively. Communications and consumer discretionary underperformed, posting -11.36% and -12.17% respectively. Energy remains the only sector with a positive return YTD, posting 12.79%.
Commodities
Oil rose this week even as crude oil inventories rose. Energy markets have been highly volatile in the COVID era, but it appears that higher oil prices may be more of the norm given recent market fundamentals. Demand is still down compared to early 2020, but as global economies are continuing to improve, oil consumption is recovering rapidly. On the supply side, operating oil rigs are still well under early 2020 numbers, but trending upwards. In addition to supply and demand, a volatile dollar is likely to have a large impact on commodity prices.
Gold rose this week even as the U.S. dollar strengthened. Gold is a common “safe haven” asset, typically rising during times of market stress. Focus for gold has shifted again to include not just global macroeconomics surrounding COVID-19 damage and recovery efforts, but also inflation and its possible impact on U.S. dollar value.
Bonds
Yields on 10-year Treasuries fell this week from 1.7841 to 1.7581 while traditional bond indices rose slightly. Treasury yield movements reflect general risk outlook, and tend to track overall investor sentiment. Expected increases in future inflation risk have helped elevate yields since pandemic era lows in rates. Treasury yields will continue to be a focus as analysts watch for signs of changing market conditions.
High-yield bonds fell this week as spreads loosened. High-yield bonds are likely to have stabilized for the short term as the Fed has maintained an accommodative monetary stance and major economic risk factors subside, likely helping stabilize volatility.
A headwind could be on the horizon for fixed income assets, as the Fed has begun tapering its asset purchases which could raise yields. Tapering will undoubtedly have an impact on yields, but the degree of impact is uncertain. In addition to asset tapering, the Fed is currently projecting it will be raising interest rates three times in 2022, adding additional interest rate risk to fixed income assets.
Lesson to be Learned
The secret to investing is to figure out the value of something – and then pay a lot less.”
-Joel Greenblatt
Brookstone Indicators
Brookstone has two simple indicators we share that help you see how the economy is doing (we call this the Recession Probability Index, or RPI), as well as if the US Stock Market is strong (bull) or weak (bear).
In a nutshell, we want the RPI to be low on a scale of 1 to 100. For the US Equity Bull/Bear indicator, we want it to read at least 66.67% bullish. When those two things occur, our research shows market performance is typically stronger, with less volatility.
The Recession Probability Index (RPI) has a current reading of 27.94, forecasting a lower potential for an economic contraction (warning of recession risk). The Bull/Bear indicator is currently 100% bullish, meaning the indicator shows there is a slightly higher than average likelihood of stock market increases in the near term (within the next 18 months).
It can be easy to become distracted from our long-term goals and chase returns when markets are volatile and uncertain. It is because of the allure of these distractions that having a plan and remaining disciplined is mission critical for long term success. Focusing on the long-run can help minimize the negative impact emotions can have on your portfolio and increase your chances for success over time.
The Week Ahead
This week sees several heavy hitters on the economic calendar, including flash PMI readings, advance GDP, PCE deflator, and the FOMC rate decision and release. All of these releases have the potential to have a significant impact on market movements.
More to come soon. Stay tuned.
