Commentary provided by Mark Szycher, Vice President, Investment Specialist, AIG Retirement Services
Market Performance Snapshot* (Week ending March 18, 2022 and Year to Date)
- Dow Jones Industrial Average®: +5.5% | -4.4%
- S&P 500® Index: + 6.2% | -6.4%
- NASDAQ Composite® Index: + 8.2% | -11.2%
- Russell 2000® Index: +5.4% | -7.1%
- 10-year U.S. Treasury note yield: 2.15%
- Up 15 basis points from 2.00% on March 11, 2022
- Up 64 basis points from 1.51% on December 31, 2021
- Best-performing S&P 500 sector this week: Consumer Discretionary, +9.3%
- Weakest-performing S&P 500 sector this week: Energy, -3.6%
*Past performance is no guarantee of future results.
Equities rebound as oil prices fall and Fed moves to rein in inflation
Major indices rose sharply for the week, helped by easing oil prices, a 0.25% interest rate hike by the Federal Reserve, Jerome Powell’s positive comments about the strength of the U.S. economy, and hints of progress on de-escalating the Russia-Ukraine conflict. The Dow Jones Industrial Average, S&P 500, and NASDAQ Composite notched their best weekly performances since November 2020.
- On Monday, concerns about the latest COVID wave in China sent indices down as investors assessed how lockdowns in major manufacturing and technology hubs including Shanghai and Shenzhen could affect global supply chains, economic growth, and inflation. However, expectations of reduced fuel demand in China helped push oil prices sharply lower, sparking a broader rally in U.S. equities as the week progressed. The Fed’s rate decision and Fed Chairman Powell’s press conference affirmed the positive sentiment.
- Easing concerns about the Russia-Ukraine conflict’s effect of oil supply also contributed to a drop of 13% in U.S. benchmark West Texas Intermediate (WTI) crude prices, though prices rallied modestly to close the week above $105/barrel, a weekly decline of less than 4%. Global benchmark Brent crude moved in similar fashion. Energy was the only S&P 500 sector in negative territory for the week, bucking the 2022 trend. Wheat, palladium, and gold all declined on the week. Nickel trading was resumed in London, experiencing significant volatility in the first few trading sessions after the halt.
- Concerns about a potential Russian debt default rose as coupon payments came due on two dollar-denominated bonds. Investors waited to see whether Russia would seek to conserve foreign currency reserves in the face of international sanctions, and whether it would be able to access international banking networks to make the payments. As of Thursday, the Russian finance ministry said it had transmitted the payments in dollars to its paying agents.
The Fed acts
As expected, the Federal Reserve’s Federal Open Market Committee (FOMC) increased the target range for the federal funds rate by 25 basis points to 0.25%-0.5%, the first increase in over 3 years. The only dissenting vote was cast by St. Louis Fed president James Bullard, who preferred a 50 basis point increase.
- The FOMC’s statement said it “anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.”
- Fed policymakers now expect a federal funds target rate of 1.9% this year and 2.8% in 2023, substantially higher than December’s projection of 0.9% in 2022 and 1.6% in 2023. Reaching 1.9% by end of 2202 would require a 25 basis point rate hike at every remaining meeting this year, unless the Fed determines that a faster pace is necessary, in which case at least one 50 basis point hike would be employed.
- In his post-meeting press conference, Chairman Jerome Powell said the Fed may be ready to begin reducing its balance sheet at its next meeting in May. The subsequent reduction in liquidity “might be the equivalent of another rate increase just from the runoff of the balance sheet.”
- The Fed could also accelerate the pace of rate hikes or balance sheet reduction if conditions warrant. “Every meeting is a live meeting,” Powell said, “and we’re going to be looking at evolving conditions, and if we do conclude that it would be appropriate to move more quickly to remove accommodation then we’ll do so.”
- In their economic projections, Federal Reserve board members and regional bank presidents substantially reduced their median expectations for economic growth this year (now 2.8% from 4.0% in December 2021), reflecting some concern about the effects of the war in Ukraine on U.S. growth. Growth forecasts for 2023 and 2024 remained the same.
- Officials also substantially increased their inflation expectations for 2022 (now 4.1% from 2.7% in December 2021) and slightly increased them for 2023 and 2024, with Powell acknowledging “inflation is likely to take longer to return to our price stability goal than previously expected.” Interestingly, the Fed’s forecasts for headline inflation and core inflation (excluding food and energy costs) are similar, suggesting officials think food and energy price surges will be short-lived.
- Despite the lower GDP growth projection and inflation risks that are “weighted to the upside,” Powell said, “we feel the economy is very strong and well-positioned to withstand tighter monetary policy.”
- Dismissing concerns that Fed rate hikes could cool the labor market too much, Powell said the current labor market is “very, very tight … tight to an unhealthy level” and needs to be brought back into balance to avoid extended upward pressure on wages and inflation.
- The 10-year Treasury yield surged again on the Fed decision, nearly reaching 2.25% before ending the week at 2.15%—the highest close since mid-2019. The 2-year yield touched 2.0% before falling back below 1.95%.
- The Bank of England raised its benchmark rate to 0.75% from 0.5%, the third rate hike in as many meetings.
Economic data show continuing inflation, particularly in energy, as other spending slows
The U.S. Producer Price Index (PPI) rose 0.8% in February, decelerating from an upwardly revised 1.2% in January. February’s 12-month rise in producer prices was 10.0%, the highest since 2010, but roughly stable since November.
- February’s PPI for goods rose 2.4%, the biggest monthly jump in records dating to 2009. Two-thirds of the increase was attributed to energy costs. PPI for services was unchanged.
- Retail sales growth slowed to just 0.3% in February after an unusually robust 4.9% gain in January. Excluding gas stations, sales were negative in February. On an annual basis, total retail sales were up 17.6%.
- After declining in January, sales at gasoline stations were up 5.3% in February (36.4% annually). Eating and drinking establishments also bounced back from a negative January with a 2.5% February gain (33.0% annually). Clothing stores saw a 1.1% gain (30.6% annually) while sales at furniture, grocery, and electronics and appliance stores were all negative.
- Initial jobless claims were lower than expected at 214,000, the lowest level since the week ending January 1st. Continuing claims fell to 1.42 million, the lowest level since February 1970.
- Existing home sales in February fell 7.2% month-over-month, more than expected, amid tight supply, high prices, and rising mortgage rates. According to Mortgage News Daily, the average 30 year fixed rate mortgage is 4.5%, up from 3.7% at the end of January and 3.25% in December. Housing starts and building permits came in ahead of expectations, though homebuilder confidence dropped for the third straight month as rising mortgage rates joined materials shortages and higher building costs as chief concerns.
Final thoughts for investors
The Fed delivered its long-awaited interest rate hike and signaled more to come in 2022. But the path ahead is far from certain as inflation lingers and war disrupts markets. Speak with a financial professional about staying focused on your long-term goals.
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