Stocks took a tumble in February along with bonds. The S&P 500 and Nasdaq touched correction (-10%) and bear market (-20%) levels, respectively.
Twin terrors of multiple Fed rate rises and war in Ukraine upset the bull's apple cart. The S&P 500 was off 14.5% from recent highs on the day Russia invaded Ukraine. Markets then rallied sharply into month-end, with the S&P 500 down 8.2% for 2022.
The Russell 2000 index of small cap stocks declined 23% into bear market territory from its 11-8-21 top. Earning reports have been strong but investors are less confident as the markets are being battered from all sides. Bonds are no haven as rates have risen and credit spreads are widening.
Energy stocks have rallied sharply in 2022 as oil prices have surged on rising demand and inadequate supply.
Assumptions of an 8.5% earnings gain have dropped to 6.5% for 2022, according to FactSet. The most recent earnings season continued to show domestic economic strength. This reality was overlooked by the market as the conflict in Ukraine escalated and the Fed tees up its first rate hike.
“How many rate rises?” is a big question for Jerome Powell and his Federal Open Market Committee. He testified yesterday a 25-bps rise will happen in March and the end of his bond buying program comes this summer.
Bonds are struggling considering inflation levels and pending rate hikes. The AGG or Aggregate Bond Index is -3.18% YTD.
War in Europe has shocked many as Russia has clearly overstepped and underestimated Ukrainian resistance. The EU/NATO reaction to was slow but will be effective in hurting the Russian economy. Markets detest uncertainty, we now have it by the barrel full. Gold up 5% YTD has been a haven while cryptos have not.
Russian sanctions will take time to bite as oil prices along commodities prices soar. Ukraine and Russia account for 24% of global grain production according to Bloomberg. Conversely, Russia and Ukraine account for only 0.5% of S&P 500 companies’ revenue, according to CNBC.
The good news is that investor sentiment has reached new levels of negativity in the latest AAII polling. As of 2-23-22 there were 23.4% Bulls and 53.7% Bears among participants. This can be an important contrary indicator.
Other signs of possible market bottoming can be found. Last week FactSet reported that 29% of S&P 500 stocks and 67% of Nasdaq stocks were more than 20% from their recent highs.
As we wrote earlier, history indicates that markets bounce back in relatively short order in response to geopolitical events. It is likely the market will soon refocus on inflation, Fed policy and corporate earnings. These focal points all present their own opportunities and challenges.
It is difficult to predict how the Russia - Ukraine war will unfold, but it is likely Ukraine will not surrender. Europe will up be spending on defense and will need to reconsider its green energy policies as 67% of German energy comes from Russia. What Mr. Putin will do next is unknown, but it is unlikely he turns his tanks around and heads home. Mr. Xi in China looks on with interest.
During times of global conflict, it is good to embrace and appreciate what our country has provided for Americans and the world.
Crown Wealth Group Investment Committee
Doug Coppola - Executive Director & Investment Committee Chairman
Steve Lindgren - Chief Investment Officer & Partner
Bob LeBeau - Research Director & Investment Committee Executive