Commentary provided by Mark Szycher, Vice President, Investment Specialist, AIG Retirement Services
Market Performance Snapshot* (Week ending April 1, 2022 and Q1 2022)
- Dow Jones Industrial Average®: -0.1% | -4.6%
- S&P 500® Index: +0.1% | -4.9%
- NASDAQ Composite® Index: +0.7% | -9.1%
- Russell 2000® Index: +0.6% | -7.8%
- 10- year U.S. Treasury note yield: 2.39%
- Down 9 basis points from 2.48% on March 25, 2022
- Up 88 basis points from 1.51% on December 31, 2021
- Best-performing S&P 500 sector this week: Real Estate, +4.4%
- Weakest-performing S&P 500 sector this week: Financials, -3.3%
- Best-performing S&P 500 sectors this quarter: Energy +37.9%, Utilities +4.1%, Consumer Staples -1.5%
- Weakest-performing S&% 500 sectors this quarter: Communications Services -11.9%, Consumer Discretionary -9.0%, Information Technology -8.3%
*Past performance is no guarantee of future results.
Equities close out a positive March
Major indices ended the week mixed but capped a positive month as investors digested strong U.S. employment data and assessed possible steps toward de-escalation in Ukraine. The U.S. Treasury yield curve inverted during the week, with certain shorter-term securities yielding more than longer-term.
- The S&P 500 exited correction territory, having rallied 9% since its most recent closing low on March 8. The Dow Jones Industrial Average is up 6.7% over the same span, while the NASDAQ Composite is up 13.4% and the Russell 2000 is up 7.7% from their closing lows on March 14.
- Equities have performed better in recent weeks as the Fed raised its benchmark interest rate to rein in inflation and as oil prices stabilized after an initial run-up associated with Russia’s invasion of Ukraine. West Texas Intermediate crude closed the week just under $100/barrel, down about 20% from its closing high on March 8.
- Oil prices declined this week as China imposed a two-stage COVID lockdown in Shanghai, a major international business and finance hub and home to the world’s largest container shipping port. The move raised concerns about further global supply disruptions, though Chinese officials sought to minimize the impact to manufacturing and transportation. China’s official purchasing managers index showed the country’s manufacturing sector having slipped into contraction in March.
- Oil prices eased further after President Biden announced a plan to release 1 million barrels per day from the Strategic Petroleum Reserve (SPR) over the next six months, for a total of 180 million barrels, the largest-ever SPR release according to the White House. Such a move would deplete the SPR by 30% from its current level. The International Energy Agency is working with other nations to tap their SPRs. Russia exports about 5 million barrels of crude per day, but a portion of that production has been shunned by international markets.
- The German government triggered an early warning system designed to prepare the country for possible future gas shortages after Russia declared its intention to require payment for natural gas shipments in rubles. Germany relies on Russia for more than 50% of its natural gas. The Russian government indicated that no supply changes were imminent, but Germany’s economy minister said, “We must increase preparedness and brace for the case of escalation by Russia.”
- The yield on the 2-year Treasury note ended the week higher than the 10-year Treasury yield, while 5-year yields also surpassed 30-year yields. Such yield curve inversions are often viewed as harbingers of recession, however the relationship isn’t definitive and the timing is uncertain. Recent moves in shorter-term and longer-term U.S. debt reflect markets assessing whether the Federal Reserve can effectively tame inflation without tipping the economy into recession.
Economic reports show strong labor market, continued inflation
The U.S. Department of Labor’s March payroll report registered 431,000 new jobs in the month, below the consensus forecast of 490,000, though the tallies in February and January were revised upward by a total of 95,000. The unemployment rate fell to 3.6%, near the pre-pandemic 3.5%.
- The leisure and hospitality sector gained 112,000 jobs, still about 1.5 million fewer than before the pandemic. Business services, retail, and manufacturing all experienced gains. The number of people unemployed for six months or longer fell 274,000 to 1.4 million, about 300,000 higher than pre-pandemic.
- The labor force participation rate edged up to 62.4% versus consensus estimates of 62.2% as more workers were drawn into the tight labor market. Just 10% of survey respondents reported teleworking due to the pandemic, down from 13% the prior month.
- Average hourly earnings grew 0.4% on the month and 5.6% over the past year, higher than February’s figures but still below the rate of inflation.
- The Personal Consumption Expenditures (PCE) price index increased 6.4% year-over-year in February, the highest since 1982. The monthly increase was 0.6%, a tick higher than January’s 0.5%. Energy prices rose 3.7% for the month; food was up 1.4%.
- Core PCE, stripping out food and energy costs, rose 5.4% in February, the highest since 1983. Monthly core PCE declined to 0.4% in February from 0.5% in January.
- Consumer spending rose 0.2% in February, cooling considerably from January’s 2.7% growth. Real consumer spending, which is adjusted for inflation, dropped 0.4%. Spending on services increased 0.9%, with food and accommodation the largest contributor. Spending on goods declined, led by reduced spending on motor vehicles and parts. Personal income rose 0.5% after increasing just 0.1% in January.
- The U.S. Department of Labor’s latest Job Openings and Labor Turnover Survey showed openings were little changed in February at 11.3 million, above the consensus forecast of 11.1 million. The number of people quitting their jobs was also little changed in February at 4.4 million, slightly below November’s record high of 4.5 million.
- At 11.3 million, the number of job openings at the end of February was about 5 million more than the number of people looking for work.
First quarter sees equities fall, Treasury yields rise amid Russia-Ukraine hostilities and Fed tightening
Thursday closed the book on a first quarter in which stocks fell steeply from January through mid-March before recovering ground in the last few weeks. Russia’s invasion of Ukraine and the Fed’s first interest rate hike since December 2018 were major market movers. Treasury yields surged—the 10-year yield climbed from 1.5% to 2.5% before receding in the last week of the quarter, while the 2-year yield jumped from under 0.8% to more than 2.4%.
- After sliding by double-digit percentages as Treasury yields rose and oil prices leapt, all major indices registered significant gains in the past three weeks to trim their quarterly losses. The benchmark S&P 500 index is still more than 100% higher than its COVID-era low reached on March 23, 2020.
- Higher interest rates weighed on growth stocks in the first quarter. The tech-heavy NASDAQ Composite was the worst-performing major equity index, and the Russell 1000 Growth index, representing the largest growth companies, declined 9.2% in the first quarter versus a 1.3% decline for the Russell 1000 Value index.
- Internationally, European stocks generally fell as inflation and concerns about energy supplies took their toll. The pan-European Stoxx 600 index fell 6.5% and Germany’s DAX index fell 9.3%. The UK’s FTSE 100 was an outlier, rising 1.8%.
- Asian markets declined as COVID lockdowns, growth and trade concerns, and difficulties in China’s tech and real estate sectors weighed on sentiment. The Shanghai index fell 10.7% in the quarter. Hong Kong’s Hang Seng index fell 6.0%. Japan’s Nikkei fell 3.4%.
- Canada emerged as a winner for the quarter, the Toronto Stock Exchange rising 3.1% amid higher growth prospects for Canadian companies filling in gaps in the global commodities trade left by declines in Russian and Ukrainian exports.
- U.S. West Texas Intermediate (WTI) crude oil rose more than 70% from January 1 through March 8, reaching an intraday high over $130/barrel. Since then the benchmark has receded more than 20%. International Brent crude prices made similar moves.
- Other commodities associated with Russia and Ukraine saw prices spikes in the quarter—wheat jumped nearly 31%, corn rose 26%, aluminum surged 24%, and palladium climbed 18%. Prices generally moderated after initial surges following the invasion in late February.
- Higher oil prices helped the S&P 500 energy sector top every other sector in Q1 with a 37.9% gain. Utilities also managed a gain. Other sectors were negative with communications services, consumer discretionary, and information technology suffering the steepest declines as interest rate increases hurt growth company valuations and inflation dented confidence in consumer stocks. Of note: All sectors were positive for March.
- Broad bond indexes suffered as interest rates rose, with the Bloomberg Barclay’s Aggregate Bond Index declining about 6% in the quarter. Bond indices consisting of longer maturity bonds fell even more steeply.
- Consumers dealt with further prices increases in the quarter, as gasoline and food prices rose rapidly in the wake of the Ukraine invasion.
- Mortgage rates reached their highest levels in three years. At the end of March, mortgage re-financings fell 60% from the prior year and home purchase applications were 10% lower, according to the Mortgage Bankers Association. Home prices continued increasing into early spring, but sales slipped amid higher prices, higher mortgage rates, and low supply.
Final thoughts for investors
The first quarter of 2022 was tumultuous for investors, with equities suffering their first quarterly losses in two years amid high inflation, geopolitical instability, surging commodity prices, continued supply chain disruptions, rising interest rates, and the lingering specter of COVID. While major indices gained in March, the future for various asset classes and geographic regions is still highly uncertain. The end of a quarter is a good time to assess portfolios and speak with a financial professional about staying on track toward long-term goals.
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