1st Quarter 2022 Market Commentary: Crosscurrents and Mixed Signals as U.S. Equities Rally in the Face of An Inverted Yield Curve
Data Source: Bloomberg
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March 2022 Highlights:
- As the Russia/Ukraine military conflict entered its first month with few signs of a ceasefire, global stocks had experienced significant selling pressure in the first half of March before rallying to close the month moderately positive. The late month rally was led by U.S. equities with the S&P 500 Index the only major region ending the month in positive territory although European stocks had ended the monthly nearly flat after having dropped over 10% earlier in the month.
- In March, the MSCI All-Country World Index (ACWI) rose 2.2% led by the S&P 500 which rose 3.7% followed by MSCI Europe (-0.1%), MSCI Japan (-0.5%), MSCI Pacific ex-Japan (-0.6%) and MSCI Emerging Markets (-2.3%).
- Commodity-focused markets such as Australia and Brazil benefited from the sharp rallies in industrial and agricultural commodities. Within MSCI Emerging Markets, Chinese-listed stocks came under heavy selling pressure earlier in the month following reports of renewed COVID outbreaks but then rallied as Chinese government officials hinted at an easing up on regulatory crackdowns and working with U.S. financial regulators to prevent de-listing on U.S. exchanges.
- Within the U.S., U.S. large caps outperformed small caps, as much of the month-end rally was focused on the perceived safety of large cap tech and consumer discretionary stocks, while value stocks outperformed growth stocks, but much of this outperformance came from late cyclicals (energy/materials). The S&P 500 Index returning +3.7% versus +0.4% for the S&P 600. S&P Pure Value outperformed Pure Growth, returning +3.5% versus +2.4%, respectively.
- During the height of the market sell-off that saw spot oil prices approaching $130/barrel, energy stocks continued their sector leadership although ‘defensive’ rate-sensitive sectors outperformed with Utilities and Real Estate among the leading sector performers alongside Energy and Materials. Consumer Staples lagged in March due to perceived margin pressures from rising commodity prices while Financials suffered due to a flattening yield curve (short-term rates rising faster than long-term rates) and reports of rising commercial loan losses, particularly in metropolitan areas that have yet to experience a full return of the workforce.
- Among risk factors, High Dividend and Value Factors underperformed all other risk factors while Minimum Volatility and Momentum outperformed. Momentum and High Quality saw a sharp recovery the latter half of the month.
- Investment grade fixed income suffered from a continued rise in interest rates as it became clearer that the Federal Reserve would need to adopt a more aggressive rate hike posture to address high inflationary pressures. The 10-Year U.S. Treasury yield reach 2.50% before settling down to 2.34% at the end of the month. Investment grade fixed income suffered due to a combination of rising interest rates and widening spreads for corporate and mortgage-backed securities. The Bloomberg/Barclays U.S. Aggregate Bond Index dropped 2.8% while the Global Aggregate ex US Index dropped -3.2%, the latter also suffering from higher interest rates as well as a strengthening U.S. dollar.
- S. high yield marginally outperformed the broader fixed income market even though credit spreads widened, although high yield credit spreads narrowed alongside the recovery in equities. The Bloomberg / Barclays US High Yield Index returned -1.1%, while Bloomberg/Barclays Emerging Market Debt Local Currency dropped 5.1% although the index stabilized following the removal of Russian debt from the major indices.
- Within equity alternatives, it was a volatile month for commodities as oil prices and industrial metals (nickel) experienced significant buying pressure before settling down. The S&P GSCI Commodities Index ended the month +9.6% although the index had been up nearly 25% earlier in the month. The Dow Jones REITs Index returned 7.1%, with much of the performance coming later in the month as the yield curve flattened, benefiting interest-rate sensitive sectors such as real estate.
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By: Benjamin Lavine