March Market Review
While the bounce in the back half of March felt like a recovery, the upside move was limited to U.S. equities and commodities while fixed income markets posted a fourth consecutive month of losses and international markets struggled through a backdrop of the war in Ukraine. Volatility across equity and interest rate markets remained elevated with the war and the removal of monetary policy accommodation the key drivers.
U.S. equities (+3.48%) led the way in March with global ex-U.S. (+1.16) markets posting more modest returns driven by commodity oriented geographies of Brazil, Norway, Denmark, Australia, and Canada. COVID-19 lockdowns across China took mainland Chinese stocks down 8% and overall emerging markets down 2.3% while economic risks stemming from the war in Ukraine pressured European equities to a 1.7% decline. The same war that pressured European equities resulted in Russian equities being excluded from all standard indexes, effectively disappearing from the global equity market landscape. Large cap stocks outperformed small caps and from a style/sector standpoint, value outperformed growth led by energy, materials, and utilities.
Commodity markets benefited from supply disruption stemming from the Russia-Ukraine war and a safe haven/inflation bid for gold. WTI oil (+4.76%) closed above $100 while natural gas surged 28%. Commodity gains were broad based during the month with grains, industrial metals, and precious metals participating in the rally.
From an economics and earnings perspective, the landscape looks relatively encouraging with the glaring exception of the prevailing global inflationary conditions. The labor market is very tight with unemployment nearly back to pre-pandemic record low levels. Both the services and manufacturing sectors are solidly in expansionary territory with robust levels of activity while restrictive Covid health policy measures have largely disappeared with China’s zero tolerance policy the only material global outlier. As we move into the first quarter earnings season, the S&P 500 is estimated to post 4.5% profit growth with a good possibility of hitting a fifth consecutive quarter of over 10% once earnings beat rates and margins begin to take shape.
Market Anecdotes
• In what Bespoke coined the ‘immaculate correction’ we’ve seen earnings estimates rising with stock prices (and multiples) falling, reflecting a relatively constructive forward runway translating to P/E multiple compression given the
Fed tightening cycle and prevailing geopolitical risks.
• Across twelve separate Fed speaking engagements, officials made clear the need for rates to reach neutral and move
into restrictive territory, while maintaining flexibility along the way.
• A key decision point for the economy and stock market will be what level is the true ‘neutral rate’ of interest. Is it the
FOMC’s terminal rate of 2.4% or is it closer to 3-4%? Stock markets would appreciate the Fed halting hikes below the
neutral rate in the short term, policy would eventually have to counteract remaining too stimulative in the long-term
• Strategas increased the percentage likelihood of recession to 35% due to the economic impacts of Fed tightening, higher rates, inflation, supply chain disruptions, and commodity price shocks. Meanwhile, yield curve slopes and economic data continue to paint a constructive picture.
• European policy makers will attempt to offset the impact of the Ukraine crisis through looser fiscal spending and U.S.
lawmakers have reopened the door to negotiations on the reconciliation package in a slimmed down version of the
initial $3.5t proposal but several roadblocks remain.
• The BCA geopolitical team is assigning a high likelihood that China will help Russia manage U.S. sanctions leading to U.S. sanctions on China later this year.
• Sector leadership across the U.S. markets so far in 2022 is basically energy then everything else, a mirror image and
clear departure from the technology led market over the past three years.
• U.S. equity markets falling and rising over 10% in a quarter is both very rare and perhaps (historically?) a positive setup to the coming months.
