The war in Ukraine continues to dominate the news cycle. We remain mindful of the great human losses and tragic conditions resulting from this conflict and hope for a speedy peaceful resolution.
Market returns continued to be driven by the news cycle during the first half of March. This is a typical market reaction to political events – the markets respond with volatility, however, it is equally typical that they recover quickly.
The disconnect between positive economic news and negative market returns remains. A recent example is the March 4th jobs report. Most economists expected 440,000 new jobs created and unemployment to drop to 3.9%. The actual numbers greatly exceeded expectations: 678,000 new jobs created, unemployment dropped to 3.8% and wages grew by 5.8% (year over year.)1
How did the markets respond to such positive news? With a single-day drop across the board, ranging from (0.53%) to (1.66%). We continue to underscore this point: economic conditions are strong and while they remain strong the market volatility, while unsettling, is not indicative of underlying problems.
Of course, there are market concerns and the most immediate risk is inflation, which has stubbornly remained elevated. This has been driven by higher energy prices (who hasn’t noticed gas prices at the pump?) and food costs. February’s inflation rate came in at 7.9% (versus February 2021.) However, keep in mind where we were last year: still embroiled in COVID with many businesses shut down and workers laid off. With the reopening of our economy, some inflation should be expected.
We wanted to share an excerpt from our March 15, 2021 newsletter:
"With a return to normal, we may see an economic surge as pent-up demand is released. That surge may very well cause an increase to inflation and interest rates, which in turn could fuel volatility in the market. However, we believe this would be short-lived as the recovery gains traction and returns to a sustainable pace. We also anticipate a sector rotation in the market as technology stocks cool down while more traditional companies begin to recover."
While we failed to predict the current state of international events, we have been expecting the very conditions we have today.
Additionally, the Federal Reserve (Fed) has many tools available to combat high inflation. [Update: The Fed raised rates 0.25% during its regularly scheduled meeting on 3/16 and signaled they may continue with as many as 6 additional rate increases over the course of 2022. This is a tricky process: while raising interest rates is an effective way to combat inflation, raising rates too quickly can hurt the economy and tip us into a recession. The measured response and disciplined approach the Fed has shown is encouraging that they will get it right.]
Wrapping up returns for the first half of the month, as of March 15th, the markets were all lower. The Dow Jones Industrial Average (Dow) fell 348 points (1.03%), the S&P 500 dropped by 111 points (2.55%) and the NASDAQ lost 803 points (5.84%).
1CNBC.com, “Dow futures drop more than 300 points following reports of smoke at Ukraine power plant”, 3/4/2022