Commentary provided by Mark Szycher, Vice President, Investment Specialist, AIG Retirement Services
Market Performance Snapshot* (Week ending March 4, 2022 and Year to Date)
- Dow Jones Industrial Average®: -1.3% | -7.5%
- S&P 500® Index: - 1.3% | -9.2%
- NASDAQ Composite® Index: - 2.8% | -14.9%
- Russell 2000® Index: 2.0% | -10.9%
- 10-year U.S. Treasury note yield: 1.73%
- Down 24 basis points from 1.97% on February 25, 2022
- Up 22 basis points from 1.51% on December 31, 2021
- Best-performing S&P 500 sector this week: Energy, +9.3%
- Weakest-performing S&P 500 sector this week: Financials, -4.9%
*Past performance is no guarantee of future results.
Russia-Ukraine conflict continues to move markets
Volatility continued as the Russia-Ukraine conflict intensified and the international effort to punish Russia through sanctions grew more robust. All major equity indices fell. After fluctuating over a wide range during the week, the 10-year Treasury yield closed at 1.73%, a weekly decline of more than 20 basis points, as investors sought safety in government bonds (bond yields move inversely to prices).
- Benchmark oil prices surpassed $115/barrel and are now 50% higher than at the start of the year. Prices of other commodities with ties to the region have also soared. Since the middle of February, wheat futures are up 50%, corn up 15%, and palladium up 27%.
- The U.S., Europe, and allies agreed to release 60 million barrels from strategic petroleum reserves, but the move wasn’t viewed as sufficient to offset potential supply disruptions, particularly as demand continues to rise globally. Russia exports 5 million barrels of crude oil per day, so an extra 60 million barrels from strategic reserves would cover just 12 days of Russian exports. Furthermore, reports have emerged that even without official sanctions, global market actors are expressing reluctance to finance, transport, or process Russian oil products given current uncertainty.
- International oil companies including BP, Exxon, and Shell announced plans to exit Russian investments, joining companies across other industries—from airlines and manufacturers to technology and media—in reducing exposure to Russia. The moves complement government sanctions including limiting access of certain Russian banks to global banking and payment systems, and imposing controls of technology exports to Russia. Major equity index providers FTSE Russell, MSCI, and S&P Dow Jones will remove Russian securities from their indices next week. The longer-term effects on Russia’s participation in the global economy or ability to attract foreign investment are unclear.
Powell supports 0.25% rate hike as inflation remains center stage
In testimony before Congress, Fed Chair Jerome Powell made his most direct statement yet on the future path of interest rates: “I’m inclined to propose and support a 25 basis point rate hike [at the Federal Open Market Committee’s March 15-16 meeting].”
- While Powell expects “inflation to decline over the course of the year as supply constraints ease and demand moderates because of the waning effects of fiscal support and the removal of monetary policy accommodation,” the chairman left open the prospect of larger hikes if warranted at future meetings: “To the extent that inflation comes in higher or is more persistently high … we would be prepared to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings.”
- Powell acknowledged increased economic uncertainty from Russia’s invasion of Ukraine: “The near-term effects on the U.S. economy of the invasion of Ukraine, the ongoing war, the sanctions, and of events to come, remain highly uncertain… We will need to be nimble in responding to incoming data and the evolving outlook.”
- In his State of the Union address, President Biden acknowledged concerns about inflation, saying “My top priority is getting prices under control.” The president pitched proposals to increase domestic manufacturing and improve infrastructure to create jobs and reduce supply chain disruptions.
- Eurozone inflation hit another high in February as price rose 5.8% over the past 12 months. Energy prices were 31.7% higher. With Europe highly dependent on Russian oil and gas, the ongoing conflict could both increase upward pressure on prices and threaten economic growth. The European Central Bank meets March 10.
- On Friday, the U.S. Department of Labor reported 678,000 jobs created in February, the strongest growth since last summer and above expectations of 440,000. The unemployment rate fell to 3.8% from 4.0% in January and the labor force participation rate ticked up. The travel and leisure sector led job gains with 179,000. December and January employment was revised up by 92,000. Total employment is now 2.1 million below the pre-pandemic level of February 2020.
- Average hourly earnings in February grew just fractionally for the month and 5.1% year-over-year vs. an annual gain of 5.5% in January. While suggesting upward pressure on inflation is abating, the minimal change in hourly earnings during the month is also evidence that current wages are not keeping up with inflation, a potential negative for consumer spending.
- Initial jobless claims for the final week of February fell to 215,000, the lowest level since the week ending January 1st.
Equity indices mostly in the red for February, Ford accelerates EV plans
Markets closed out a tough February, as the S&P 500, Dow Jones Industrial Average, and NASDAQ Composite each declined more than 3%. The small-cap Russell 2000 managed a nearly 1% gain amid the volatility.
- Energy was the only S&P 500 sector in the green for February, rising 6.4% as oil prices climbed and concerns about energy supplies grew. Communications services dropped nearly 7%, burdened by Facebook’s 34% decline, while information technology stocks were down 5% as investors rotated out of growth stocks amid higher inflation and interest rate expectations.
- The yield on the 10-year Treasury note was fairly stable in February, climbing just under 5 basis points to close near 1.83%, but the 2-year yield leapt 25 basis points, closing at 1.43% as inflation data and comments from Fed officials solidified assumptions that the Fed will hike interest rates in March.
- Target, which beat quarterly earnings estimates while falling slightly short on revenue, projected slower growth in 2022—but still higher than estimates—as consumers adjust to higher prices and reduced government stimulus. The company will try to hold the line on prices as much as possible, the company’s CFO saying, “We have many levers to combat costs, and price is the one we pull last, not first.” Target and some other retailers are now in a period in which sales will be judged against a high pandemic-era baseline.
- Zoom Video Communications, which surged during the pandemic, beat expectations last quarter but issued downbeat guidance for the current quarter and full year. The company aims to sustain growth despite stiffer competition and more people headed back to offices.
- Ford announced the creation of two divisions, one focused on traditional gasoline-powered vehicles and the other on electric vehicles. The company also announced stepped-up EV investment and raised the outlook for EV profit margins while forecasting EVs will account for 50% of global sales by 2030, up from a previous forecast of 40%. Ford stock gained more than 8% after the news.
Final thoughts for investors
Market volatility is elevated and the near-term global outlook is cloudy, but that shouldn’t precipitate actions that might diminish the likelihood of achieving your long-term goals. Stay focused on the future and speak with a financial professional about managing investments in an uncertain environment.
VC 30955 (03/2022) J822601 EE