Weekly Market Update — March 1, 2022

By Hightower St. Louis on March 1, 2022

MARKETS ENDURE MORE VOLATILITY AS RUSSIA INVADES UKRAINE BUT REBOUND WHEN RUSSIA INDICATES IT IS READY FOR DIPLOMATIC TALKS

• Wall Street went through another volatile week, as investors digested the implications of the Russian invasion of Ukraine, but ultimately the week ended with mostly positive returns
• When the week was over, the DJIA was down a smidge, losing 0.1% after being down more than 5% earlier in the week
• NASDAQ gained 1.1% on the week, after being down as much as 7% mid–week; the S&P 500 gained 0.8%, after being down as much as 5% mid–week; and the Russell 2000 gained 1.6%, after being down as much as 5% mid–week
• The story of the week was obviously Russia invading Ukraine, as a host of sanctions followed, with other significant sanctions held in reserve
• By the end of the week, it appeared as if Russia had completed its “special military operation” and said it was ready for diplomatic talks with Ukraine
• Eight of the 11 S&P 500 sectors closed higher this week, led by the defensive names, as Health Care (+2.7%), Real Estate (+2.7%), and Utilities (+2.0%) all outperformed while Consumer Discretionary (-2.2%) underperformed
• WTI crude topped $100/barrel earlier in the week, but ended up just shy of $92/barrel for a modest 0.4% gain
• There was a lot of economic news to digest, including that the PCE Price Index jumped 0.6% last month and is up over 6% for the past 12–months
• The 2–year Treasury yield rose to 1.59% and the 10–year yield rose to 1.99%
• The U.S. Dollar Index rose 0.5% to 96.54

Weekly Market Performance

Markets Rebound Late in the Week After Falling Big

It was a holiday–shortened week for Wall Street, but wow did investors deal with a lot (markets were closed Monday in observation of Presidents Day). Worries of a Russian invasion of Ukraine came true and volatility spiked on Thursday to a 2–year high as markets dropped dramatically, especially the futures markets on Wednesday night.

For perspective, 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. Here is another example of volatility – Tesla added about $100 billion to its market cap on Thursday alone – but was still down more than 5% on the week.

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

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, driving longer-term Treasury yields lower, but by day’s end Wall Street reversed course.

Also helping Wall Street’s mood was the fact that there was a slew of corporate earnings reports and mostly positive economic news. Specifically, in economic news:

• Redbook’s same–store sales index rose 14.5% this week compared to the year–ago week versus 15.4% for the previous week
• The Mortgage Bankers Association’s Purchase Index fell 10% last week, the second 10% decline in the last three weeks
• The MBA’s Refinance Index fell 16% last week, after almost double–digit declines for each of the previous two weeks
• Conforming 30–year mortgages are up more than 75 basis points so far in 2022
• New orders for durable goods in January are up 1.6% compared to last month
• The second estimate of fourth quarter GDP is up 7.0%
• Personal income was up marginally in January
• The PCE price index up 0.6% on the month and 6.1% over the past 12-months
• Energy rose 25.9% year–over–year and food was up 6.7%
• Sales of new single–family homes fell 4.5% in January

A Week (Day) of Volatility

On Wednesday, 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 as volatility spiked.

Also on February 24th, the Chicago Board Options Exchange Market Volatility Index, often called the “Fear Index” or just the VIX, shot up to over 36 from the mid–20s the day before.

When the final bell rung on February 24th, the S&P 500 was up 1.5% and NASDAQ had jumped 3.3%. Those were some very large intraday swings

Personal Income Up

On Friday, 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 Orders Up

On Friday, the Census Bureau 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.

Consumer Confidence Declined for Second Consecutive Month

On Tuesday, 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

Michael Becker, CFA®

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