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.

Weekly Market Report: April 4, 2022

Last week put a wrap on the month of March and the first quarter of 2022 with oil markets, inflation, and the yield curve driving the narrative. The first three months of the year delivered quite the rollercoaster ride with double digit equity market swings in both directions while March was a solidly positive month for stocks, commodities, and the USD. The same cannot be said for bond markets which ended the month with a bear flattener, an inverted 2y-10 yr slope, and higher rates in five of the last seven quarters.

Market Anecdotes

• U.S. equity markets were flat for the week but delivered strong returns in March with value (+3.5%) outperforming
growth (+2.4%) and large caps outperforming smaller caps. Energy and utilities were the standout performers while
financials and telecom lagged.
• 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.
• While the stock market bounced sharply higher over the last two weeks of March, the bond market did not. Bianco
Research noted March was the eighth consecutive month of losses for The Global Aggregate Index.
• The 2yr/10yr slope inverted last week, triggering much hand wringing and recession talk. The reliability of the indicator and equity market performance following inversions are mixed at best.
• Statista published an alarming snapshot of crypto heists dating back to 2014 estimating over $3.1b in theft cumulatively over the past eight years.
• The Administration announced a plan to release strategic petroleum reserves of 1mbpd for a period of six months while reinvesting proceeds in the out years, effectively taking advantage of record high backwardation currently seen in the market.
• The Administration also announced plans to introduce a speculation tax on companies that have federal land drilling
leases but are not producing out of those acres.
• The Administration announced plans, under the Defense Production Act, to support production and processing of key battery inputs (lithium, nickel, cobalt, graphite, and manganese).

Weekly Market Report: March 28, 2022

Last week was the 2-year anniversary of the 3/23/20 Covid low from which we enjoyed an approximate 100% return on
the S&P 500. Last week, financial markets digested a Fed narrative that many felt was more hawkish than the FOMC
meeting narrative the prior week as well as continued Russian aggression in Ukraine and more commodity price
inflation. Equity markets managed to deliver a second consecutive positive week despite Treasury yields moving sharply higher to levels not seen since 2019. The U.S. was up 1.5% while international markets were flat to slightly negative while the yield curve moved higher in a parallel fashion leaving the 10yr UST at 2.48% as we approach quarter-end.

Market Anecdotes

• The selloff in U.S. treasuries continued last week with yields continuing their move sharply higher in a relatively
parallel fashion across the curve while the slope remained. A key question is at what level do higher yields begin
to pressure risk assets?
• 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.
• Arbor Research published a note illustrating the fact that inflation is clearly a global phenomenon with annual
inflation ranging from 42% in South America to 5.7% in Canada.
• 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.
• With such a pronounced two-year return ending March 2022, the third year of a strong bull market does tend to
pose more challenging returns for investors.
• A more strategic (and contrarian) view on Europe given the Ukrainian crisis is that the U.S. economic recovery is
more advanced, leaving Europe with more of a recovery window. U.S. GDP recovered to Q4 2019 level back in 2Q
2021 while Europe reached it finally in Q4 2021.
• Short-term risks surrounding housing are mounting given the rise in interest rates and the impact on
affordability/monthly mortgage payments while long-term fundamentals remain intact.
• 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.

Weekly Market Report: March 21, 2022

Last week was certainly a nice break from the unfriendly side of market volatility. War, monetary policy, Covid BA.2 data points, and both policy and politics in China were the primary influences driving markets last week. The S&P 500 was up 6.2% while developed international (+7.5%) and emerging markets (+6.6%) performed even better. The recovery was broad-based across sectors with only energy (-3.6%) posting losses. Interest rates ticked higher, and the yield curve flattened as investors handicapped Fed policy and narratives following the highly anticipated meeting and corresponding 25bps rate hike from the FOMC. Commodity markets (-2%) and the USD (-0.9%) were down slightly last week.

Market Anecdotes

•U.S. equity markets bounced higher in strong fashion last week with a string of four +1% moves (S&P 500 and NASDAQ) and even bigger bounces in Europe and U.S. small caps.
• After a ‘death cross’ on Monday, the S&P 500 went on to rally sharply back above its 50-day moving average, broke the downtrend channel in place since the early January record, and pushed nearly back to its upper Bollinger Band.
• The Fed raised rates by 25bps, forecasted six more, and reiterated they will remain nimble as data rolls in. Dot plot
interest rate projections show a 1.9% median target by year-end and a 2.8% target by the end of 2023. Balance sheet policy guidance (QT) will be forthcoming in May.
• The FOMC GDP forecast for 2022 was ratcheted down from 4.0% to 2.8%, the inflation outlook was increased from 2.6% to 4.3%. Wage growth and housing costs are the key ‘sticky’ components while supply chain and Russia-Ukraine disruptions loom in the background.
• 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.
• Last week the BoE delivered a dovish surprise with its 25bps rate hike by signaling a more cautious outlook and policy approach while the BoJ held rates steady as expected.
• China’s top economic official provided assurance that policymakers will implement measures to stimulate the economy and support the capital markets provided a big mid-week boost to risk assets.
• China’s zero-tolerance policy towards the COVID-19 may carry consequences to domestic economic conditions in addition to further aggravating global supply chain disruptions.
• The WSJ noted Zillow’s $56,000 average home price appreciation through February 2022 is the first time in the data series history where the homes earned more than their owners.
• The specter of rising rates and a narrow equity risk premium has owners of vanilla 60/40 portfolios driving plenty of attention and focus on alternative investments.
• Oil supply is under a microscope with the spike in uncertainty given stronger than expected U.S. production discipline, core-OPEC 2.0 production increases, and Iran/Russia indicating favorable resolution of their trade concerns which should allow 1.3m b/d back into global export markets.

Economic Release Highlights

• U.S. Retail Sales for February were in line with consensus estimates (0.3% vs 0.4%)
• February PPI data were in the ballpark of very hot consensus expectations with MoM headline (0.8% vs 1.0%) and core (0.2% vs 0.6%) readings and YoY readings of 10% and 8.4%.
• February U.S. Housing Starts (1.769mm), Housing Permits (1.859mm), and Existing Home Sales (6.020mm) were relatively in line with expectations.
• The March Housing Market Index fell just short of expectations at 79 versus consensus of 81.
• February U.S. Industrial Production of 0.5% and Manufacturing Output of 1.2% were at and in excess of consensus respectively.

Weekly Market Report: February 25, 2022

Market Anecdotes