Published March 4, 2022
Another week, and another twist in our market narrative. Investors are trying to parse so many crosscurrents, we can all be forgiven for not knowing which end is up these days. We are now 100% certain the Fed will raise interest rates at their March meeting. However, that once-possible 0.50% rate hike went out the window when Russian troops marched into Ukraine. The resulting dip in longer-term bonds has flattened the yield curve (blue line below compared to black line of a year earlier) such that the difference between 5 and 10-year yields is down to a paltry 0.15%, hardly worth five additional years of risk. Contrast that to the difference between a 1 and 2-year bond at a much heavier 0.4%. Recall that one of the stock market’s unhappy metrics is an inverted yield curve, when short-term rates move above longer-term rates – a display of concern about future economic growth.
The weakness in markets thus far in 2022 has removed some of the froth from valuations though. The chart below shows that the price-earnings ratio on projected earnings has dropped sharply. The ratio is back where it was before the pandemic, though still not cheap by any means. This makes sense as interest rates have gone back to pre-pandemic levels. It was, in large part, interest rates at 0% that sent stock prices to such elevated levels. That has all unwound now.
Meanwhile, speaking of cheap assets, the Russian stock market, or at least the ETF attempting to reflect Russian assets, has plunged below the levels seen during the financial crisis. Impossible to know what the earnings of Russian companies will be as they are, temporarily(?), cut off from the global financial system.
With the Russian market decline being the largest on record for a major stock market as shown here:
All of this adds up to a quickly and dramatically shifting landscape for investors. It’s no surprise they have cut back on risk until some clarity returns. The Fed meeting this week might provide a little of that clarity.
Another week of the invasion of Ukraine by Russia brought more market turmoil. While the S&P500 didn’t move all that much, finishing 0.26% below where it opened on Monday, a lot happened under the surface. Vladimir Putin started the week by putting his nuclear weapons command on high alert, news that further set the market on edge and led to stock selling around the globe. Selling continued into Tuesday as oil prices continued to rise on increasing sanctions against Russia. After two negative volatile days, stocks bounced back on Wednesday when Fed chair Jay Powell stated that a 0.25% interest rate hike would be appropriate at the next Fed meeting in March. This removed a tremendous amount of uncertainty and showed a clear backing off from the 0.5% that markets had been pricing in only a week before. Stocks bounced back a brisk 1.8% on the news (S&P500). Optimism continued into Thursday’s session more countries aligned in supporting sanctions against Russia and also because it appeared that Ukraine was having some success in slowing Russian incursions. Late Thursday news that Russian shelling had started a fire at a Ukrainian power plant sent stock futures lower overnight. Selling continued into Friday’s US trading as the S&P500 closed 0.8% lower on Friday which didn’t seem so bad after watching European stocks get shellacked with losses ranging from -3.6% for Belgium to -6.6% for Italy. Of note, several US retailer stocks had phenomenal weekly advances on strong earnings and outlooks: Nordstrom +16%, Kroger +26.9%, Target +12.4% and even Walmart +4.7% on in sympathy. At the end of Friday, the Whitehouse stated that they were considering a complete ban on Russian oil imports which appears to have bipartisan support.
For the week the S&P500 (SPY) fell -1.29%, the NASDAQ 100 (QQQ) fell -2.45% and the Russell 2000 (IWM) closed down -1.90% The standout sector for the week was integrated oil & gas (ticker XLE) which closed the week up a remarkable 9.20% even after some major firms wrote down the value of their Russian assets and exited Russian joint ventures.
Warm wishes and until next week.