Market Commentary - February 2022

| March 07, 2022

U.S. Markets Down in February

Similar to the month of January, although nowhere near the same degree, U.S. equity markets were down for the month of February, with NASDAQ recording its biggest two-month drop since March 2020.

But it wasn’t just U.S. equity markets that performed poorly this month – developed markets outside the U.S. turned in poor performance too – as 35 of the 36 developed markets tracked by MSCI declined and 4 of them dropped by more than 5%. But performance for emerging markets was mixed, with markets in Eastern Europe suffering significant losses on account of Russia’s invasion of Ukraine.

For the month of February:

The DJIA was down 3.5%;
The S&P 500 was down 3.1%;
NASDAQ was down 3.4%; and
The Russell 2000 was down 0.1%.

The theme that drove market performance was very different from the ones that helped drive performance for the prior months (and most of last year). In February, Wall Street dealt with increasing worries and then the eventual invasion of Ukraine by Russia late in the month.

Volatility spiked, oil prices rose and investors tried to digest what this might mean for equity and fixed- income markets as the invasion added to an already- full plate of market worries that included rising inflation, the Federal Reserve’s timing of rate hikes, and supply chain issues.

Volatility, as measured by the VIX, rose most of the month, starting February in the low-20s and jumping by 1/3 as it ended the month in the low-30s.

West Texas Intermediate crude also rose significantly in February, beginning the month around $88/barrel and ending the month just over $100/barrel. For perspective, at this time last year, the price of a barrel was about $60.

Market Performance Around the World

Investors looking outside the U.S. saw overwhelmingly poor performance, as 35 of the 36 developed markets tracked by MSCI were down in January, with most of them losing about 3%.

But performance for emerging markets was mixed, as 25 of the 40 developing markets were negative in February, with many suffering significant losses of over 40% (MSCI EM Europe, MSCI Eastern Europe and MSCI EFM Europe+CIS).

Sector Performance Was Pretty Good

For the month of February, sector performance was mixed, leaning more towards being flat, as 9 of the 11 S&P 500 sectors were green, with 5 of the 9 gaining less than 1%. But given the volatility on the month, the fact that most were green was a statement.

And while two months is not very much to reach any conclusions, it is interesting to see the difference a month can make, as in January we saw 10 of the 11 red, with only the Energy sector gaining that month.

In addition, for February the range in sector-returns was fairly wide, with the Energy sector gaining over 6% and the Communication Services sector losing almost 2%.

Here are the sector returns for the month of February and January (two very short time-periods):

Russia Invades Ukraine

During the last week of the month, worries of a Russian invasion of Ukraine came true and volatility spiked on Thursday the 24th to a 2-year high as markets dropped dramatically, especially the futures markets on Wednesday night.

As news of the attacks and footage of the invasion started hitting social media, the futures market Wednesday night dropped dramatically as did stocks when the bell rang on the NYSE Thursday morning. Investors rushed to safe-assets and drove longer- term Treasury yields lower.

But by the end of the day Thursday, Wall Street reversed course. In fact, on Thursday, NASDAQ saw a daily swing of almost 7%, trading down by almost 4% and then recovering and tacking on a gain of 3.5% for the day.

Not surprisingly, it was the defensive names that outperformed that day, as the Health Care, Real Estate, and Utilities sectors all gained at least 2%.

The Fed Turning Less Hawkish

The other dominant theme this month revolved around whether the Fed might need to raise short- term interest rates more quickly and more often, eating into future profits, especially within the high- flying tech names. Then Russia invaded Ukraine and investors were trying to decipher whether the war would push the Fed into a more dovish stance, rather than risk raising rates too quickly and too far.

Notwithstanding the timing, the fed funds futures market is predicting that there could be 5 rate hikes (that’s 1.25%) this year.

And as you can see from the chart below, the vast majority of Wall Street is expecting a 25-basis-point increase at the Fed’s mid-March meeting.

Volatility Spikes in February

Volatility as measured by the CBOE Volatility Index reached its highest level since the beginning of the pandemic. And February saw a significant increase in volatility, especially on the day that Russia invaded Ukraine.

S&P 500 Enters Correction Territory

On February 23rd, the S&P 500 entered its first correction in a long time (a correction is defined as a market decline of at least 10% from recent highs). Technically, the S&P 500 had not seen a correction in almost two years, but that changed when Russia invaded Ukraine.

That evening, after stock markets in the U.S. closed, S&P futures pointed to a pretty significant decline the following day, suggesting that markets might drop by 3-4%. And sure enough, U.S. markets opened and proceeded to drop quickly.

Then a curious thing happened: markets rose throughout the day. And when the final bell rung on February 24th, the S&P 500 was up 1.5% and NASDAQ had jumped 3.3%.

But by the time markets closed the books on the month, the S&P 500 was still in correction territory (as was NASDAQ and the Russell 2000 too).

Personal Income Up

Late in the month, the Bureau of Economic Analysis reported that personal income increased $9.0 billion (less than 0.1%) in January. In addition:

Disposable personal income increased $19.8 billion (0.1%) and personal consumption expenditures increased $337.2 billion (2.1%)
Real DPI decreased 0.5% in January and Real PCE increased 1.5%
Goods increased 4.3% and services increased 0.1%
The PCE price index increased 0.6%
Excluding food and energy, the PCE price index increased 0.5%

The increase in personal income in January primarily reflected an increase in compensation that was partly offset by a decrease in government social benefits. Within compensation, the increase reflected increases in both private and government wages and salaries. Within government social benefits, a decrease in "other" social benefits (reflecting the end of advance Child Tax Credit payments as authorized by the American Rescue Plan) was partly offset by an increase in Social Security benefits (reflecting a 5.9 percent cost-of-living adjustment).

Durable Goods Up

The Census Bureau also reported that new orders for manufactured durable goods in January increased $4.3 billion or 1.6%. This increase, up eight of the last nine months, followed a 1.2% December increase.

Excluding transportation, new orders increased 0.7%
Excluding defense, new orders increased 1.6%
Transportation equipment, up three consecutive months, led the increase, $2.9 billion or 3.4 percent to $87.6 billion.

In addition:

Shipments of manufactured durable goods in January, up eight of the last nine months, increased $3.1 billion or 1.2%
Machinery, up ten of the last eleven months jumped 2.7%
Inventories of manufactured durable goods in January, up twelve consecutive months, increased 0.4%

Trade Deficit Widens

On the last day of the month, the U.S. Census Bureau announced the international trade, wholesale inventories, and retail inventories advance statistics for January 2022 and results were up across the board.

Advance International Trade in Goods

The international trade deficit was $107.6 billion in January, up $7.2 billion from $100.5 billion in December.
Exports of goods for January were $154.8 billion, $2.8 billion less than December exports.
Imports of goods for January were $262.5 billion, $4.4 billion more than December imports.

Advance Wholesale Inventories

Wholesale inventories for January, adjusted for seasonal variations and trading day differences, but not for price changes, were estimated at an end-of-month level of $798.2 billion.
This is up 0.8% from December 2021.
This is up 17.8% from January 2021.
The November 2021 to December 2021 percentage change was revised from up 2.2% to up 2.3%.

Advance Retail Inventories

Retail inventories for January, adjusted for seasonal variations and trading day differences, but not for price changes, were estimated at an end-of-month level of $658.1 billion.
This is up 1.9% from December 2021.
This is up 6.0% from January 2021.
The November 2021 to December 2021 percentage change was revised from up 4.2% to up 4.7%.

Consumer Confidence Slips Again

On the 22nd, the Conference Board announced that its Consumer Confidence Index fell in February, after having declined in January too.

The Index now stands at 110.5 (1985=100), down from 111.1 in January.

The Present Situation Index – based on consumers’ assessment of current business and labor market conditions – improved to 145.1 from 144.5 last month.
The Expectations Index – based on consumers’ short-term outlook for income, business, and labor market conditions – declined to 87.5 from 88.8.

Present Situation

Consumers’ appraisal of current business conditions was mixed in February.

18.7% of consumers said business conditions were “good,” down from 20.0%.
However, 24.7% of consumers said business conditions were “bad,” down from 27.4%.

Consumers’ assessment of the labor market was also mixed.

53.8% of consumers said jobs were “plentiful,” down from 55.0% but still a historically strong reading.
However, 11.8% of consumers said jobs are “hard to get,” down from 12.0%.

Expectations Six Months Hence

Consumers’ optimism about the short-term business conditions outlook eased in February.

23.4% of consumers expect business conditions will improve, slightly down from 23.6%.
However, 18.1% expect business conditions to worsen, down from 19.7%.

Consumers were also less optimistic about the short- term labor market outlook.

21.3% of consumers expect more jobs to be available in the months ahead, down from 22.1%.
17.9% anticipate fewer jobs, up from 16.6%.

Consumers were less positive about their short- term financial prospects.

15.7% of consumers expect their incomes to increase, down from 16.2%.
12.1% expect their incomes will decrease, unchanged from last month

Sources: conference-board.org; bea.gov; census.gov; msci.com; fidelity.com; nasdaq.com; wsj.com; morningstar.com