US equity markets fell this week as geopolitical tensions look poised to boil over. Russia has all but yelled
“Charge!” as it is poised to invade its neighbor Ukraine. While US exposure to the conflict is minimal from
both a military perspective and an economic perspective, effects of an invasion could still be felt around the
globe, especially if reactionary sanctions from western countries target Russian energy. If sanctions do
target Russian oil and gas, expect pain caused by already inflated energy costs to increase. In good news,
industrial production and capacity stateside beat expectations, hopefully indicating that production
constraints may start easing. 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, 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 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
In spite of the high risk of war in Eastern Europe, expectations for European equities remain favorable, with
average forecasts indicating roughly 10% upside for stocks.
Market Update
Equities
Broad market equity indices finished the week down with major large cap indices underperforming 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 mostly negative this week. Consumer staples and materials outperformed, returning 1.11%
and -0.26% respectively. Communications and energy underperformed, posting -2.47% and -3.71% respectively.
Energy holds the lead YTD, posting 21.78%.
Commodities
Oil fell this week as crude oil inventories grew. 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.
A source of volatility for the oil sector is likely to be the Ukraine-Russia standoff. If the conflict turns
bloody, western sanctions could put upward pressure on oil and gas prices.
Gold rose this week as the U.S. dollar weakened slightly. 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 1.9371 to 1.9286 while traditional bond indices fell.
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 tightened slightly. 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 starting in March, adding additional interest rate risk to fixed income assets.
Lesson to be Learned
Know what you own, and know why you own it.”
-Peter Lynch
StockPointDigital Indicators
StockPointDigital 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 30.65, 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 will see updates to economic indicators from multiple sectors of the economy including PMI
readings, the PCE deflator index, and durable goods orders.
More to come soon. Stay tuned.