History Or Mystery?

The mystery of man has no beginning and no end. His intuition and feeling unfold and blend. The Mystery of Man – William Hermanns

 

For investors, the experience of March may have felt a bit like a walk in the park, but readers of the financial press perhaps wondered if it was a book best placed back on the shelf. “Strong Finish Can’t Salvage Tough Quarter for Stocks” opined The Wall Street Journal on the month’s final day with that publication adding, in another article, “Bond Market Suffers Worst Quarter in Decades.” Bank of America cautioned “Stock Surge Is a Bear Market Trap with Curve Inverted.”

Investors may have felt themselves in the need of seeking the ministrations of a chiropractor as the S&P 500 offered an experience realized only for the twelfth time in the more than three-hundred quarters since the conclusion of the Second World War; returns of both plus and minus “double digits”. From January 3rd to the quarter’s lows on March 7th the S&P declined 13% followed by an 11% rise by March 28th. Let us hope that history will repeat itself this next quarter and year as the S&P was positive the following quarter ten of those eleven prior times with average returns of 11% and positive returns in all instances the following year with returns averaging 30%!

And what of that inverted yield curve “B of A” cautioned us about? The Federal Reserve, confronted with inflation numbers three times greater than its cited 2% target, grew the talons of a hawk and shredded the script from which it had only recently invited others to read. On March 16th, the Fed raised interest rates ¼%, its first increase since December 2018 and set expectations for similar increases at each of its remaining six meetings this year cautioning that it would be willing to consider increases of ½% should inflation remain “elevated and persistent”. Interestingly, the fixed income markets responded most dramatically in widening the “spread” between the rates on 90-day treasury bills and 2-year treasury notes to their widest levels since 1994. And so why should we care? Because it is the markets way of communicating its view that inflation is indeed transitory with future inflation expectations rising less than that of longer dated interest rates. Though media pundits are chirping about inverted yield curves, the reality is that inflation adjusted future interest rate levels on 10-year treasury bonds are actually rising. And that, my friends, may also be predicting higher rates of economic growth later this year and may also explain a rising stock market.

Putting together the puzzle pieces of various market returns is certainly an exercise in the interesting. Utility stocks are considered by many to be “bond surrogates” as they are valued more as sources of income rather than growth. With 20-year US treasuries declining 5 ½% for the month one might not have expected utility stocks to rally 10 1/3% for the month. With natural gas prices rising 27 ½% and oil 10% for the month, gold prices rose, a beat of the drum here, 1 ¼%. And with rising geopolitical tensions leading to, one might think, an increasingly risk averse investor population, the world’s best performing stock market for the month and quarter was…Brazil, delivering returns of 15% and 35% respectively.

The S&P 500 returned 3.76% for the month and -4.62% for the quarter with the growth portion 4.45%/-8.56% and the value 3.02%/-0.13%. Small Cap stocks hit the snooze button returning 1.16% for March and -7.54% for the quarter. The stock market party was for US attendees only as foreign developed markets were 0.52% for the month and with those markets underperforming the S&P with a -6.46% for Q1. For 60% equity/40% fixed income investors the quarter delivered a -4.0% return (0.66% in March) as the negative returns on equities -4.75% (+2.4% in March) were, unhappily for investors, married to fixed income’s -3.0% returns in Q1 (-2.0% in March).

 

Mark H. Tekamp, April 6, 2022

You-Pain?

“The secret of change is to focus all of your energy, not on fighting the old, but on building the new.” – Socrates

 

The war in Europe feels like footsteps not quite reaching the pavement. The March 1st Financial Times headlined “Nike Suspends Online Purchases in Russia” and “Carmaker Ford Suspends Operations in Russia”. The same day’s Wall Street Journal joined in with “The West’s Sanctions Barrage Severs Russia’s Economy from Much of the West”. Interestingly though, the sanctions – at least those imposed to date – appear to be focused primarily upon the financial rather than economic part of Russia’s relationship with those seeking to punish it. The United States now imports more oil from Russia than any other country and that country, with its adversary Ukraine, accounts for 29% of global wheat exports. The loss of life and destruction in Ukraine is both real and tragic but with Russia’s relatively unimpeded access to the global marketplace and the United States and its European allies disclaiming the possibility of intervening directly, the conflict seems likely to remain localized and so its impact upon the US economy may be significantly less than markets are currently discounting, creating the possibility of a positive surprise.

Yahoo Finance was left to wonder in a story on March 2nd that “All in all, the stock market is hanging tough in what has been a turbulent two weeks for humanity.” There certainly is volatility aplenty in virtually all financial markets with gold’s 6% rise for the month acting as a sort of thermometer for the emotional state of global markets. CNN’s Fear & Greed Index has fallen to 17, a measure representing Extreme Fear and a level not seen since March and April of 2020, the onset of the global pandemic. The 10 Year US Treasury rate, which started out the year at 1.52% and reached a peak yield of 2.05% on February 15th, ended the month at 1.83%. Confounding most investors focusing upon news headlines, US mid cap and small cap stocks actually rose in February and the S&P 500 ended the month higher than its closing level on January 27th.

While much of the world has been focused upon war in Europe and the likelihood of the Fed’s raising interest rates, there is something much larger at work impacting our economy and that may be what will most influence financial markets this year. Since the Global Financial Crisis of 2008 central banks have targeted an inflation rate of 2% which would have allowed them to seek to manage the inflation adjusted rate of interest to below zero, but stubbornly persistent low levels of inflation confounded their attempt to achieve that objective. Now, with inflation levels likely to remain at 4% to 5% levels through the remainder of the year and with 10 Year Treasury Rates at less than 2%, money has rarely been less expensive. With economic demand outstripping supply creating the ability to achieve attractive rates of return through investments in the real economy, it may be time to toss out the old play book because this sure looks like a new world!

Equity markets in February contributed negatively to returns on investor’s portfolios of approximately -2.25% with technology’s -5% return a source of negativity offset by the aforementioned positive returns of small cap and mid cap stocks and Energy’s +6% and +26 ½ % returns year to date. Foreign stocks, which had avoided most of the negative returns of those US markets in January, matched the S&P’s -3% return for the month. Interest rates rose modestly in February resulting in -1% returns for the fixed income portion of portfolios leaving 60/40 portfolios -1.7% for the month and – 5% year to date.

 

Mark H. Tekamp; March 6, 2022