Economic data for the week included declines in several national housing numbers, such as existing home sales and homebuilder sentiment; however, housing starts rose a bit. The index of leading economic indicators showed growth, but at a tempered pace from preceding months.
Global equity markets fell back last week, in keeping with continued concerns over the ongoing Ukraine war as well as hawkish rhetoric from global central bankers. Bonds declined due to that same rhetoric, which pushed intermediate-term interest rates higher, and foreign bonds hurt by a stronger dollar. Commodities reversed trend last week, by falling back across the board, notably in energy.
Economic data for the week included gains in retail sales, as well as improvement in consumer sentiment, and continued healthy jobless claims. However, producer and consumer price inflation continued to come in at multi-decade high levels.
In a holiday-shortened week, global equity markets were mixed to lower, as high inflation readings and negative sentiment about Ukraine weighed on risk-taking. Foreign outperformed the U.S. slightly due to a weaker dollar. Bonds continued to lose ground as interest rates climbed higher in keeping with high CPI and PPI readings. Commodities also gained, with crude oil and natural gas prices rising sharply.
In a light week for economic data, ISM services sentiment continued to show strength, while the minutes from the most recent March Fed meeting laid out a plan for faster rate hikes and a plan to allow for a balance sheet run-off of treasury and mortgage bonds.
Equity markets in both the U.S. and abroad fell back last week, as interest rates ticked higher and economic concerns weighed on sentiment. Bonds suffered along with rising rates. Commodities were mixed, with gains in agriculture offset by less volatile energy prices last week.
Economic data for the week included minimal revisions to prior-quarter U.S. GDP growth, and a slight decline in the pace of still-positive ISM manufacturing sentiment. Housing prices continued to rise at a solid clip, while labor markets continue to demonstrate a recovery, notably in nonfarm payrolls for March.
U.S. equity markets were little changed on net, and were outshined by gains in foreign markets. Bonds gained ground to end the quarter, as interest rates fell back from highs. Commodity prices fell back, led by energy, along with a potential increase in crude oil supply from government reserves.
It has been a volatile start to the 2022 year; the LSA committee will be implementing model updates to the mutual fund and ETF models. These changes will only impact the models listed at this time. As bonds continue to struggle and inflation fears continue to grow, the committee believes the updates will help with posturing the models for what could continue to be a difficult year for both bonds and equities. Due to the recent weakness in fixed income and growth, we will be making some changes in an effort to help models find good risk adjusted upside. Below you will find a breakdown of the upcoming changes:
Posted Monday, March 28th – Private Client, PC Tax Efficient, PC Traditional, PC Blended, ETF, BME and CBP – targeted model update – Monday, April 4th.
Posted Wednesday, March 30th – PC Income Strat, PC L100k, PC IQ, SRI, and ETF Tactical – targeted model update – Wednesday, April 6th.
*Next Round will be posted on April 1st, and will include the rest of the mutual fund models as well as updates to the variable annuity models.
*The mutual fund model revisions impact the NTF models as well.
*As a reminder, the Revision Explanation Presentation/Video will be posted in the “Portfolio News” section on each of the platform home pages.
Investment Rationale:
Log-in to your LSA account then click here to view the investment rational
Economic data for the week included a decline in durable goods orders and new home sales, and consumer sentiment fell to multi-year lows. However, jobless claims again reached multi-decade levels of strength.
U.S. equity markets gained ground last week, despite a more hawkish Fed; foreign markets were mixed, based on the relative impacts of high energy prices and the war in Ukraine. Bonds fell back sharply, as hawkish central bank language caused interest rates to drift higher in a variety of maturities. Commodities continued to gain across the board along with supply shortages, notably in energy and metals, due to the war in Ukraine and associated Russian sanctions.
U.S. stocks gained last week, with the Fed’s recently hawkish comments, combined with an uncertain outlook for Ukraine, resulted in mixed performance for stocks and bonds as markets digested the implications. By sector, energy stocks gained over 7% in keeping with oil prices, followed by materials and utilities. Health care and real estate came in the rear, with minimal change in either.
Fed Chair Powell’s speech to the National Association for Business Economics was watched more closely than normal last week. (Fed members give a lot of speeches.) It was especially noteworthy for its hawkish tone (moving from ‘steadily’ to ‘expeditiously’ raising rates), which caused yields to continue to push higher, as chances of a 0.50% hike once or more have risen. Speeches are a subtle tool, but fall within the ‘forward guidance’ playbook. If markets expect the Fed to move at a faster rate, some of the central bank’s work in tightening policy is already accomplished (at least for intermediate- to longer-term rates). Some of the more aggressive language is due to increasing consumer sentiment that inflation might be more persistent than first assumed—one of the Fed’s biggest challenges is inflation becoming ‘unanchored’ from their long-term target, which can begin to alter consumer behavior, as it did in the 1970s. However, economists still have little insight into what causes consumer inflation expectations to evolve the way they do (well, aside from prices themselves). Stock investors have generally cheered the more hawkish language, as an aggressive Fed that achieves lower inflation readings would be a positive for equity markets. The wrinkle is rising recession risk.
Foreign stocks were also mixed last week, with gains in the U.K. and Japan offset by a weaker Europe and emerging markets. The regional results are unsurprising, considering the proximity and Ukraine/Russia energy price impact on Europe. Emerging markets were mixed, as countries such as Brazil gained sharply along with higher world commodity prices, while China fell back with concerns over growth and a continued pandemic lockdown for a greater segment of the population.
U.S. bonds fell back dramatically last week, as the Bloomberg U.S. Aggregate declined nearly -2% (worse than many bad years in total). With a yield cushion, credit outperformed treasuries slightly, and floating rate bank loans were minimally changed in price. The reality of a tougher Fed, ready to fight inflation at the expense of other concerns, appeared to be a key catalyst in interest rates moving higher across the yield curve. In fact, the 5s-10s treasury slope is actually slightly inverted at this point, although the 2s-10s remains minimally positive, albeit narrower. (Market probabilities of a recession in the next 12 months don’t appear to be the base case, but they have certainly risen from very low levels.) Foreign bonds also fell back last week, not helped by a stronger dollar, in both developed and emerging markets. Interestingly, the Russian ruble recovered a bit on the week, with an announcement from Russia that foreign energy payments must be made in rubles—requiring foreign governments to reestablish ruble holdings (and boosting the currency in the process, as designed, in a way to circumvent the negative impact of sanctions).
Commodities gained several percent on the week, led by a double-digit increase in energy, while metals and agriculture also gained. The price of crude oil rose by over 10% to just under $109/barrel, with supply concerns not helped by pipeline disruptions and a separate drone attack on a Saudi fuel depot. Natural gas markets were affected by a potential deal between the EU and U.S. to provide LNG exports, although it won’t make up for the significant proportion of Russian production; prices rose nearly 15% on the week in keeping with continued supply uncertainty in the sector. Sentiment continues to be driven by persistent demand globally, although tempered a bit by the Chinese lockdowns, while supply is a large wildcard.
Period ending 3/25/2022
1 Week (%)
YTD (%)
DJIA
0.31
-3.60
S&P 500
1.81
-4.35
NASDAQ
1.99
-9.28
Russell 2000
-0.38
-7.22
MSCI-EAFE
0.19
-7.09
MSCI-EM
0.22
-8.39
Bloomberg U.S. Aggregate
-1.82
-6.89
U.S. Treasury Yields
3 Mo.
2 Yr.
5 Yr.
10 Yr.
30 Yr.
12/31/2021
0.06
0.73
1.26
1.52
1.90
3/18/2022
0.42
1.97
2.14
2.14
2.42
3/25/2022
0.55
2.30
2.55
2.48
2.60
Sources: LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.
FOR ADVISOR USE ONLY – NOT FOR DISTRIBUTION TO THE PUBLIC WITHOUT PRIOR APPROVAL FROM YOUR RESPECTIVE FIRM’S COMPLIANCE DEPARTMENT
The Federal Reserve Open Market Committee raised the key fed funds interest rate today by 0.25%, to a new range of 0.25-0.50%. This first hike in four years was as expected, with the Fed communicating their intention and amount fairly directly in recent weeks. However, at least until the Russian invasion of Ukraine, there was debate about whether the hike could be as high as 0.50%. In fact, there was one dissent in the committee decision, by Fed St. Louis President Bullard, who preferred the 0.50% hike.
The formal statement language noted that economic conditions continue strengthen, led by job gains. However, inflation was acknowledged as remaining elevated, but to ‘supply and demand imbalances’. The Russian invasion of Ukraine was mentioned, with future impacts remaining uncertain, but are likely to push inflation upward, and weigh on economic growth downward.
Economic data for the week included the consumer price index rising to another multi-decade high, job openings continued to show strength, while jobless claims were little changed.
Global equity markets lost ground again in keeping with the geopolitical and economic aftermath of the Ukraine conflict, although hopes for diplomacy resulted in a few positive days. Bonds fell back as well, with interest rates rising on net along with record inflation data. Commodities prices pulled back after a strong run since the start of the conflict.
Economic data for the week included a robust employment situation report, as well as other labor metrics, and improved manufacturing and construction activity.
Global financial market sentiment continued to be driven by the Russia-Ukraine conflict, with U.S. and especially foreign stocks losing ground and staying in correction territory. Bonds were mixed, with higher-quality safe haven debt faring positively. Commodities experienced sharp gains, led by crude oil and grains—exports most affected by Russian and Ukrainian supplies.
Economic data for the week included a slight revision to prior-quarter GDP, a continued gain in house prices, and continued lower jobless claims. However, the Russian invasion of Ukraine dominated most other news.
Global equity markets initially fell sharply last week, in the ramp-up to the Russian invasion, which had been brewing for weeks. However, stocks recovered after the military activity started and rumors of negotiations came. U.S. bonds started strong but fell back as interest rates ticked higher along with a return to inflation worries. Commodities gained across the board, notably in energy and agriculture, due Russian and Ukrainian-specific supply concerns.
A variety of conflicts involving major world powers have tended to historically raise short-term volatility in global financial assets. However, market damage has tended to be short-lived, as in the magnitude of a typical market correction (-10% or a bit more). One has currently been already underway since January, mostly due to interest rate fears, but also the probability of Russian military action in the Ukraine. Markets have reacted worse (such as -20% bear market-type declines) during broader regional conflicts, such as World War II or the Israel/Arab war in 1973. In the majority of cases, though, recoveries have also been relatively swift, and there has not been as much direct long-term economic impact as one might fear.
Economic data for the week included retail sales that came in higher than expected, as well as gains in industrial production, mixed regional manufacturing sentiment and housing metrics, and a slight pullback in the index of leading indicators.
U.S. and foreign equity markets fell back last week, as tensions over Russia and Ukraine wavered (generally rising), in addition to continued strong U.S. inflation rhetoric. Bonds were mixed, with yields little changed, but credit spreads widened. Commodities were also mixed, with gains in metals offset by a pullback in oil prices by several percent.
LSA Connect 