Commentary provided by Mark Szycher, Vice President, Investment Specialist, AIG Retirement Services
Market Performance Snapshot* (Week ending February 25, 2022 and Year to Date)
- Dow Jones Industrial Average®: -0.1% | -6.3%
- S&P 500® Index: +0.8% | -8.0%
- NASDAQ Composite® Index: +1.1% | -12.5%
- Russell 2000® Index: +1.6% | -9.1%
- 10-year U.S. Treasury note yield: 1.97%
- Up 4 basis points from 1.93% on February 18, 2022
- Up 46 basis points from 1.51% on December 31, 2021
- Best-performing S&P 500 sector this week: Health Care, +2.7%
- Weakest-performing S&P 500 sector this week: Consumer Discretionary, -2.2%
*Past performance is no guarantee of future results.
Hostilities in Ukraine generate market volatility
Equities dropped sharply as Russia-Ukraine hostilities intensified before staging a major comeback Thursday afternoon and Friday as fear eased and some investors took advantage of buying opportunities. The S&P 500 sank into correction, down more than 10% since its early-January high, before recovering ground. The S&P 500, NASDAQ Composite, and Russell 2000 all managed a gain for the week; the Dow Jones Industrial Average was slightly negative. Treasury yields fluctuated as investors weighed the possible economic impact of the Russia-Ukraine situation against continuing expectations of a Fed rate hike.
- Russia’s incursion into Ukraine prompted the U.S., UK, and European Union to begin imposing sanctions. The German government froze the certification process for the NordSteam 2 pipeline, expected to double Russian natural gas exports to Germany once approved and operational. Benchmark West Texas Intermediate (WTI) oil prices rose sharply and briefly reached $100/barrel before retreating to $92/barrel as investors assessed the potential impact on global oil supplies. European natural gas prices also jumped, as did other commodities with ties to the region, including wheat and metals.
- In remarks announcing sanctions, President Biden acknowledged higher commodity prices could pinch consumers: “Defending freedom will have costs for us as well, here at home. We need to be honest about that…I want to limit the pain the American people are feeling at the gas pump. This is critical to me.”1
- Thus far, neither sanctions nor the conflict on the ground have materially impacted Russia’s supply of energy to Europe and into the global energy market. As Russia is a significant supplier of crude oil and natural gas to Europe, any disruption could be highly impactful to European households during the winter months and to energy-intensive industries such as food and beverage production, basic chemicals, and pulp and paper.
- Investors questioned whether the Russia-Ukraine conflict could influence the Fed’s rate decision in March. For now, most market participants expect the Fed to move forward with a 25 basis point (0.25%) rate increase next month, with fewer investors now pricing in a 50 basis point rate hike.
- In quarterly earnings news, Home Depot beat income and revenue estimates, but attributed some sales growth to inflation. The firm also forecast slower growth in 2022, noting that supply chain challenges remain. The company’s incoming CEO said the speed at which products move off shelves in the supply-constrained environment is “not dissimilar to a storm event.”
- Lowe’s topped revenue and earnings expectations and raised its outlook for 2022. As with Home Depot, the number of sales transactions declined during the quarter, but the average amount spent on each transaction increased. The company said it is expanding its supply chain network to make more inventory available.
- Macy’s beat revenue and earnings expectations and issued 2022 guidance above analysts’ forecasts. While inflation, supply chain, and labor challenges persist, the company expects consumer demand to remain resilient, particularly as people return to offices and engage in more social activities this year.
Economic data re-affirm high inflation, solid Q4 economic growth, some consumer concerns
The Personal Consumption Expenditures (PCE) price index rose 0.6% in January and 6.1% over the last 12 months, in line with expectations but higher than December’s figures of 0.5% and 5.8%. Core PCE—the Fed’s preferred inflation gauge, stripping out volatile food and energy prices—rose 0.5% in January and 5.2% over the last 12 months, also in line with expectations. 5.2% over the last 12 months is ahead of the 4.9% for the 12 months ending in December.
- The 12-month PCE and Core PCE figures of 6.1% and 5.2% were the highest in nearly 40 years.
- This PCE report was the last to be released prior to the next Fed meeting on March 15-16. One more Consumer Price Index report will be released on March 10.
- Along with the PCE figure, the Commerce Department reported consumer spending rose 2.1% in January, exceeding the 1.6% market consensus and significantly stronger than a drop of 0.8% in December.
- The U.S. Census Bureau reported that new orders for durable goods rose 1.6% in January, exceeding market expectations of a 0.8% rise, following an increase of 1.2% in December. Orders for transportation equipment led the increase, rising 3.4%.
- GDP growth for Q4 2021 was revised slightly higher to 7.0% (from the previous estimate of 6.9%), bringing full-year 2021 growth to 5.7%, the fastest pace since 1984. Most analysts expect 2022 growth of 3-4%, lower than in 2021 but still above the average annual growth of 2.6% over the last 40 years.
- IHS Markit’s U.S. composite Purchasing Managers Index (PMI)—measuring both manufacturing and services—rose to 56.0 in February from 51.1 in January as the economy shook off the effects of Omicron and supply chain concerns continued to ease, though costs and price pressures continued to climb. UK and Eurozone PMIs also rose.
- The Conference Board’s consumer confidence index fell to 110.5 in February from 111.1 in January, with inflation weighing on sentiment: “While [consumers] do not expect the economy to pick up steam in the near future, they also do not foresee conditions worsening. Nevertheless, confidence and consumer spending will continue to face headwinds from rising prices in the coming months.”
- The S&P CoreLogic Case-Shiller National Home Price Index posted an 18.8% gain in 2021, the fastest pace since the data series began in 1987. Separately, the Commerce Department reported January’s sales of new homes declined 4.5% month-on-month and 19.3% from the previous year amid rising mortgage rates and higher prices.
- Initial jobless claims fell to 232,000 and continuing claims fell to 1.48 million, the lowest level for continuing claims since 1970.
Final thoughts for investors
Russia-Ukraine hostilities have injected substantial uncertainty into markets, while inflation and Fed action remain on the market’s radar. At times of heightened volatility, it’s especially important to stay focused on long-term goals. Speak with a financial professional about navigating the terrain ahead.
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