March 05, 2022

Monthly Market Summary – February 2022

Volatility driven by heightened uncertainty summarizes financial market activity in February. Investor sentiment was at times buoyed by solid earnings reports and improving COVID news. At other times sentiment was battered by inflation data and related worries about the pace and timing of monetary tightening, as well as the growing threat of a Russian invasion of Ukraine and the potential negative impact on supply chains. In reaction, stock, bond, and other risk asset markets rose and fell throughout the month experiencing sharp and rapid turns as news changed. In the end, most global stock and bond indices ended lower while commodity prices rose. In equity market results, U.S. large-capitalization (cap) and European stocks underperformed while U.S. small-cap and Latin American markets outperformed.

To recap, equities rebounded on strong earnings reports during the first week of February after a weak January. Then hotter than expected inflation reports along with comments from Federal Reserve (Fed) President Bullard calling for aggressive interest rate hikes and increasing tensions between Russia and Ukraine sent equity and bond prices lower and commodity prices higher. Better diplomatic news on the Russia/Ukraine situation sent markets higher. However, stocks sold off again on a higher-than-expected jump in the producer price index but soon reversed again on strong economic news including better than expected retail sales. Escalating geopolitical tensions sent equity markets lower again with bonds, gold, and commodities rising. The S&P 500 index fell into a correction on February 22 (down 10% from its recent peak). Global equity markets sank and government bond prices rose on the 24th on news that Russia had invaded Ukraine. However, by the close of the 25th markets reversed and stock indices ended the week higher as investors stepped in to buy after the steep price drops and Putin agreed to negotiations.

As serious as the Russia/Ukraine situation is, investors continue to focus on inflation and central bank actions. The reports released in February showed inflation continues to rise globally. The U.S. personal consumption expenditure index rose 6.1%, the highest since 1983. The consumer price index (CPI) increased to 7.5%, a four-decade high. The CPI for the euro zone rose to 5.1% and the CPI for the United Kingdom rose to 5.5%, a 30-year high. China is an outlier with the latest CPI report coming in at less than 1%. However, China is also an outlier with slowing economic growth. For example, the manufacturing index declined to 49.1, which is below the 50 mark that separates contraction from expansion and the services index dropped to 51.4 from 53.1 in the prior month. Higher commodity prices and the potential for disruptions to supply chains due to the Russia/Ukraine conflict are raising inflation expectations and complicating central bank decisions on how to cool inflation which is further fueling investor uncertainty.

Interestingly, after hitting bear market territory (down 20% from a recent peak) in January, the Russell 2000 index of small sized company stocks posted a positive return in February and outperformed the Russell MidCap and S&P 500 indices. Only 3 of the 11 sectors in the Russell 2000 index had a negative return for the month and those returns were less than -0.5%. In comparison, energy was the only sector in the S&P 500 index to post a positive return. Energy was the best performing sector in each market cap segment. Value stocks outperformed growth stocks in each market cap segment since energy, materials, and industrials were the top performing sectors while information technology and communications services were among the weakest performing sectors.

Both the MSCI EAFE index of developed international equities and the MSCI Emerging Markets (EM) index posted a negative return for the month. The EM index had a larger negative return than the EAFE index since it was dragged down by the over 50% decline for the Russia index in reaction to the Ukraine invasion and resulting sanctions. Several Latin America region country indices, such as Brazil, Chile, and Mexico had mid-single digit gains boosted by the increase in commodity prices. Indonesia also had a strong positive return. In the developed international market segment, most European country indices had mid-single digit negative returns reflecting inflation concerns particularly from rising energy prices and worries about the impact of sanctions imposed on Russia. Australia, New Zealand, and Canada posted positive returns helped by higher commodity prices. The United Kingdom and Israel also posted gains for the month. Value stocks outperformed growth stocks in both the EAFE and EM indices. Generally, defensive sectors such as utilities and consumer staples outperformed growth sectors such as consumer discretionary and information technology. Energy was by far the worst performing sector in the EM index, hurt by the Russian oil company exposure.

All sectors of the U.S. bond market, except the inflation-protected securities index, ended the month with a negative return. The indices composed of the longest time to maturity bonds posted the lowest returns. Even though there were periods when Treasury bonds rallied on flight to safety trading in reaction to geopolitical events, inflation reports and related expectations for more aggressive monetary tightening by the Fed sent bond prices lower and yields higher most of the month. The 10-year Treasury bond yield briefly rose to over 2% for the first time since 2019 but ended the month at 1.83%. As a reminder, the 10-year yield was 1.52% at the end of 2021. Shorter-term bond yields rose more. The 2-year Treasury bond yield was 1.44% at the end of February, up from 0.73% at the end of 2021.

The Bloomberg Commodity index generated a return of about 6.2% for the month. Each of the sub-indices we track posted a positive return. The grains sub-index was the performance leader with a double-digit gain driven by concerns about interruptions in exports from Russia and Ukraine and the likelihood of no planting in Ukraine in Spring. The petroleum sub-index also had a double-digit gain. The price for West Texas Intermediate crude oil briefly rose to over $100 per barrel during the month for the first time since 2014 due to strong demand and concerns about tightening supply resulting from the war in Ukraine. Gold was up about 6% and ended the month at $1,909 per ounce.

Vogel Consulting, LLC (Vogel) Tactical Recommendations

Market selloffs, while uncomfortable, are not unusual events. The sell-off so far in 2022 is not unwarranted considering the uncertainty created by the heightened geopolitical tensions and the shift by global central banks to aim for normalized monetary policy after a period of unusually accommodative policies. However, economic reports particularly in the U.S. remain strong with unfilled orders, pent-up demand for housing, and strong labor markets providing support for future growth. How long inflation will remain at an historically high level and what the impact of inflation will be on consumer spending and business activity will be monitored closely by market participants and will likely be a key driver of market movements.

We continue to have a neutral view on growth relative to value preferring to have exposure to sectors benefiting from longer-term secular growth trends along with some exposure to cyclicality. Our short-term tactical recommendations within the equity allocation are to overweight U.S. equities, underweight international developed equities, and equal weight emerging market equities relative to long-term strategic targets. Within our fixed income recommendation, we continue to favor short to intermediate maturities. We continue to recommend an underweight allocation to hedge funds. We recommend keeping at least a year of cash reserves to avoid having to raise cash during a period of market volatility

The statistical information contained in this commentary has been compiled from publicly available sources and is presented to you for your review and for discussion purposes only. The information contained in this commentary represents the opinion of the author(s) as of its date and is subject to change at any time due to market or economic conditions. These comments do not constitute a recommendation to purchase, sell or hold any security, and should not be construed as investment advice or to predict future performance. Past performance does not guarantee future results.

The statistical information contained in this commentary was derived from sources that Vogel Consulting, LLC believes are reliable, and such information has not been independently verified by Vogel. Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of the Russell Investment Group. An index is not managed and is unavailable for direct investment.