Market Commentary – March 2022
Wall Street dealt with several major issues in the first quarter of 2022. Investors had to evaluate the impact of rising inflation, higher interest rates, ongoing coronavirus concerns, and the Russia-Ukraine war. Each of the benchmark indexes listed here lost value by the end of the quarter. However, Treasury yields, the dollar, gold, and crude oil prices ended the first quarter higher. Among the market sectors, energy increased nearly 40.0%, while utilities climbed about 5.0%. The remaining sectors ended the quarter in the red, with consumer services (-12.0%) and information technology (-8.0%) losing the most.
The yield on 10-year Treasuries rose nearly 80 basis points. Crude oil prices increased nearly $28.00 per barrel, or 38.0%, in the first quarter. The dollar gained nearly 2.8%, while gold prices advanced more than 6.0%. The national average price for regular gasoline was $4.231 per gallon on March 28 th, $0.950 higher than the January 3 rd price of $3.281 and $1.379 higher than a year ago.
January began the quarter with stocks reaching new all-time highs. Unfortunately, that was the high point of the month for Wall Street. The first month of the year turned out to be a pretty rough one for investors. The Russell 2000 lost 9.7%, the Nasdaq slid 9.0%, the S&P 500 dipped 5.3%, the Dow fell 3.3%, and the Global Dow slipped 0.6%. In all, January produced the worst first-month performance since 2009, and that includes a notable rally over the last two days of the month. Investors dealt with concerns over rising inflation, the prospects of higher interest rates, and the pace of global economic recovery, despite the fourth-quarter U.S. GDP advancing at an annualized rate of 6.9%, while nearly 200,000 new jobs were added. On the other hand, industrial production slowed and new orders for durable goods declined. Prices at the pump increased, closing the month at about $3.323 per gallon for regular gasoline. Ten-year Treasury yields, the dollar, and crude oil prices climbed higher, while gold prices fell.
February also opened the month on a high note, but stocks tumbled into the red by the end of the month. The S&P 500 fell to its lowest level since June 2021. Not only were investors still coping with rising inflation and interest-rate hikes, but a new crisis emerged in February — Russia's invasion of Ukraine. The United States and several other nations imposed sanctions against Russia, some of which were aimed at curtailing Russian oil and natural gas exports, which resulted in a surge in energy prices. Initially, the conflict in Ukraine shook global financial markets as stocks fell, and concerns grew that heating bills and food prices would skyrocket. By the close of the month, the Dow, the S&P 500, and the Nasdaq fell more than 3.0%. Ten-year Treasury prices initially fell on inflation worries, although yields later advanced as bond prices receded. The dollar and gold prices rose. Crude oil prices jumped more than 8.0% from the previous month, reaching $95.62 per barrel on the last day of February.
Despite attempts at peace talks, the war in Ukraine intensified in March, prompting the imposition of more economic sanctions against Russia. Inflationary pressures continued to mount, which led the Federal Reserve to raise interest rates 25 basis points with additional rate hikes anticipated. Nevertheless, stocks showed resilience. Each of the benchmark indexes posted gains from February. The S&P 500 rose 5.0%, the Nasdaq gained 4.7%, the Dow added 3.6%, the Russell 2000 climbed 2.1%, and the Global Dow increased 1.9%. Although crude oil prices were trending lower by the end of March, they were still $8.00 per barrel higher than where they began the month. The yield on 10-year Treasuries advanced nearly 50 basis points. The dollar gained 1.5%, and gold prices climbed 1.9% to $1,945.70 per ounce.
Following a strong July and August, September saw the market struggle with volatility. Traders had other concerns to deal with, including slowing economic growth, elevated inflation, supply-chain disruptions, a global energy crunch, and China's regulatory restrictions. In addition, investors are facing the prospects of the Federal Reserve beginning to wind down its stimulus measures. Each of the benchmark indexes lost value, with the Nasdaq falling more than 5.0% and the S&P 500 dipping 4.8%. Among the market sectors, energy climbed 8.5%, while the remaining sectors ended well in the red. Crude oil prices rose more than 9.0% to close the month over $75.00 per barrel. The dollar and 10-year Treasury yields advanced, while gold prices declined.
As of March 31 st
|Quarterly Change||YTD Change|
|S & P 500||4,766.18||4,530.41||3.58%||-4.95%||-4.95%|
|Federal Funds||0.00% – 0.25%||0.25% – 0.50%||25 bps||25 bps||25 bps|
|10-yr Treasury||1.51%||2.32%||49 bps||81 bps||81 bps|
*Chart reflects price changes, not total return
Last Month's Economic News
- Employment: Employment rose by 678,000 in February, notably higher than the January revised total of 481,000. Despite the increase, employment is down by 2.1 million, or 1.4%, from its pre-pandemic level in February 2020. The unemployment rate inched down by 0.2 percentage point to 3.8%. The number of unemployed persons decreased 243,000 in February to 6.3 million. By comparison, in February 2020 prior to the coronavirus (COVID-19) pandemic, the unemployment rate was 3.5%, and the number of unemployed persons was 5.7 million. The labor force participation rate increased 0.1 percentage point to 62.3% in February. Average hourly earnings were relatively unchanged at $31.58. Over the last 12 months, average hourly earnings rose by 5.1%. The average work week rose by 0.1 hour to 34.7 hours in February.
- FOMC/interest rates: Following its meeting in March, the Federal Open Market Committee increased the federal funds target rate range by 25 basis points to 0.25%-0.50%. In support of its decision, the Committee noted that inflation remains elevated due to imbalances related to the pandemic, higher energy prices, the Russia-Ukraine conflict, and broader price pressures. In addition, the FOMC anticipates six more rate hikes, some could be by as much as 50 basis points.
- GDP/budget: Gross domestic product rose 6.9% in the fourth quarter of 2021 compared with a 2.3% advance in the third quarter. The increase in GDP primarily reflected increases in private inventory investment, exports, personal consumption expenditures, and nonresidential fixed investment that were partly offset by decreases in both federal and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased. Consumer spending, as measured by personal consumption expenditures, was 2.5% in the fourth quarter (2.0% in the third quarter). Spending on goods rose by 1.1%, while spending on services climbed 3.3%.
- Inflation: The Consumer Price Index climbed 0.8% in February after climbing 0.6% in the previous month. Increases in the indexes for gasoline, shelter, and food were the largest contributors to the CPI increase. The gasoline index rose 6.6% in February and accounted for almost a third of the overall February increase. Since February 2021, the CPI has risen 7.9% — the largest increase since the period ending January 1982.
- Prices that producers receive for goods and services jumped 0.8% in February following a 1.2% increase in January. Producer prices have increased 10.0% since February 2021. Prices less foods, energy, and trade services increased 0.9% in January, the largest increase since rising 1.0% in January 2021. For the year, prices less foods, energy, and trade services moved up 6.6%. In February, prices for goods jumped 2.4%, while prices for services were unchanged. A major factor in the February increase in the prices for goods was an 8.2% increase in energy prices, within which gasoline prices spiked 14.8%.
- Housing: Sales of existing homes reversed course, falling 7.2% in February after advancing 6.7% in January. Year over year, existing home sales were 2.4% under the February 2021 estimate. According to the latest survey from the National Association of Realtors ®, housing affordability continues to be a major challenge, as buyers are getting a double whammy: rising mortgage rates and sustained price increases. The median existing-home price was $357,300 in February, up from $350,300 in January and 15.0% more than February 2021 ($310,600). Unsold inventory of existing homes represents a 1.7-month supply at the current sales pace. Sales of existing single-family homes also fell, down 7.0% in February after rising 6.5% the previous month. Since February 2021, sales of existing single-family homes have fallen 2.2%. The median existing single-family home price was $363,800 in February, up from $357,100 in January.
- Sales of new single-family homes fell 2.0% in February after decreasing 8.4% (revised) in January. The median sales price of new single-family houses sold in February was $400,600 ($427,400 in January). The February average sales price was $511,000 ($494,000 in January). The inventory of new single-family homes for sale in February represented a supply of 6.3 months at the current sales pace, up from January's 6.1-month supply. Sales of new single-family homes in February were 6.2% below the February 2021 estimate.
- Manufacturing: Industrial production increased 0.5% in February following a 1.4% increase in January. In February, manufacturing rose 1.2% and mining increased 0.1%, while utilities fell 2.7%. Total industrial production in February was 7.5% higher than it was a year earlier. Since February 2021, manufacturing has risen 7.4%, mining has jumped 17.3%, while utilities decreased 1.2%.
- February saw new orders for durable goods decrease 2.2%. This decrease, down after four consecutive monthly increases, followed a 1.6% January increase. Excluding transportation, new orders fell 0.6% in February. Excluding defense, new orders dropped 2.7%. Transportation equipment, down following three consecutive monthly increases, led the decrease, declining 5.6%.
- Imports and exports: Import prices rose 1.4% in February after advancing 1.9% in January, according to the U.S. Bureau of Labor Statistics. Higher fuel and nonfuel prices drove the increases in both months. Contributing to the increase in February import prices was a 6.9% jump in fuel prices. Prices for nonfuel imports rose 0.8% in February. For the 12 months ended in February, prices for imports have advanced 10.9%. Over the same period, prices for fuel have increased 53.0%. Prices for U.S. exports advanced 3.0% in February following a 2.8% rise the previous month. The February advance in export prices was the largest since January 1989. Higher prices for both agricultural and nonagricultural exports in January contributed to the overall increase in U.S. export prices. Export prices have risen 16.6% since February 2021.
- International Markets: While business activity in the United States picked up despite the turmoil in Ukraine, Europe hasn't been quite as fortunate. Most of Europe has seen the war exacerbate already strained supply chains, which has sent prices for raw materials and energy soaring — despite the lifting of most pandemic-related restrictions. The European Central Bank lowered its forecast for economic growth in the eurozone from 4.2% to 3.7%, while acknowledging that the impact of the Russian invasion could be larger. In Japan, the government proposed more measures to boost the economy. China saw a drop in stock prices after reports of a worsening coronavirus outbreak across the mainland. Overall, for the markets in March, the STOXX Europe 600 Index rose 3.1%. The United Kingdom's FTSE gained 2.0%. Japan's Nikkei 225 Index climbed 6.2%, while China's Shanghai Composite Index fell 6.3%.
- Consumer Confidence: The Conference Board Consumer Confidence Index ® rose slightly in March following a decline in February. The index stands at 107.2, up from 105.7 in February. The Present Situation Index, based on consumers' assessment of current business and labor market conditions, improved to 153.0 in March, up from 143.0 in February. The Expectations Index, based on consumers' short-term outlook for income, business, and labor market conditions, declined to 76.6 in March, down from 80.8 in February.
Eye on the Year Ahead
Despite accelerating inflation, the war in Ukraine, and rising interest rates, most economic indicators are still demonstrating varying degrees of strength. However, March data may begin to show some economic slowing. Gross domestic product, which ran at an annualized rate of nearly 7.0% in February, is likely to recede, while the pace of job growth may decelerate. While the Federal Open Market Committee does not meet in April, it is expected to push interest rates up by 50 basis points in May. Hopefully, a resolution to the Russia-Ukraine conflict is near.
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