US equities fell this week as the cost of commodities jumped. In welcome news, February hiring beat analyst expectations by a wide margin, with unemployment rates declining to the lowest level since the pandemic. Fed Chair Powell’s testimony was welcomed by markets, as he reiterated his support for only a 0.25% rate hike in March. In spite of the substantial economic developments here at home, all eyes remain fixed on the Russian invasion of Ukraine and its possible outcomes. While war is never a welcome headline, the primary risk to the US economy right now remains inflation. Time will tell whether the Fed is doing too little too late on inflation, but their willingness to act late is better than continuing to invoke that inflation is “transitory.” Overall, 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 and took a beating, while Japanese markets returned modest negative performance. Improving prospects against the pandemic as well as improved prospects for economic recovery should continue to help lift markets globally over time, but conflict in eastern Europe as well as 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 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
Volatility in oil trading spiked last week as the war in Ukraine continues to rattle energy markets. WTI finished the week up 26.30% over the prior week.
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 mixed this week. Energy and utilities outperformed, returning 9.26% and 4.78% respectively. Technology and financials underperformed, posting -3.01% and -4.87% respectively. Energy holds the lead YTD, posting 34.79%.
Commodities
Oil rose this week as crude oil inventories shrunk. Demand is still down compared to early 2020, but as global economies are continuing to recover from the pandemic lockdowns era, 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.
The primary source of volatility for the oil sector is and is likely to continue to be the Ukraine-Russia conflict. Western sanctions could put upward pressure on oil and gas prices.
Gold rose this week 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. A new source of volatility will likely continue to be the conflict in Ukraine, as conflict may push investors into safe havens. Industrial metals are also under upward pressure. Copper and aluminum both jumped in price over the prior week.
Bonds
Yields on 10-year Treasuries fell this week from 1.9617 to 1.7307 while traditional bond indices rose. 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 projected to raise interest rates multiple times in 2022 starting in March, adding additional interest rate risk to fixed income assets.
Lesson to be Learned
The desire to perform all the time is usually a barrier to performing over time.”
–Robert Olstein
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 31.05, forecasting a lower potential for an economic contraction (warning of recession risk). The Bull/Bear indicator is currently 33% bullish, meaning the indicator shows there is a slightly lower 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 will see updates to consumer sentiment and CPI readings. CPI is expected to rise further while sentiment is expected to recede.
More to come soon. Stay tuned.
