Conway’s QuickTake: Week of February 21, 2022

Here’s What Happened Last Week: 

U.S. Equity Markets

  • U.S. stocks had another challenging week after the escalating Russia/Ukraine conflict and rate hike concerns weighed on sentiment. 
  • Large-cap and growth-oriented stocks generally suffered the largest declines. Meta Platforms (Facebook), had meaningful losses. 
  • Within the S&P 500 Index, the communication services and energy sectors were the bottom performers.
  • The more defensive consumer staples sector was one of the few areas of the market to book a gain driven by gains in Walmart and P&G. 
  • Trading volumes were light last week despite the level of volatility heading into the long weekend.
  • Recent volatility has pushed the S&P 500 Index down 8.6% so far this year, while the tech-heavy NASDAQ Composite has fallen an even more sobering 13.3%. 
Source: iStock 2022

International Equity Markets

  • International markets also fell last week. International developed losses were in-line with U.S. counterparts while emerging markets outperformed in a relative sense. International equity markets have maintained a lead over domestic markets so far in 2022. 
  • European equities sold off following rising tensions in Ukraine, which is likely to have more of a direct impact on the region. 
  • Japanese equities produced a negative return last week weighed down by similar global factors as other areas of the market. 
  • Chinese equities were one of the few areas to log gains last week. Supportive comments by the government and lower-than-anticipated inflation figures helped support markets. 

Credit Markets

  • The 10-Year Treasury yield fell from highs reached earlier in the week above the significant 2% threshold to close at ~1.93%. 
  • Impending Federal Reserve (Fed) action paired with mixed signals from Russia kept volatility elevated in the bond market. 
  • Investment-grade corporate spreads were wider during the week following a risk-off sentiment and higher than expected inflation. That said, new issuance was generally met with adequate demand as the market stabilized.
  • The high yield market also sold off, suffering from similar inflation and supply chain concerns that may be exacerbated by a potential conflict in Russia.
  • Municipal funds continued their recent trend of outflows following a record-breaking period of straight inflows over the past year+. That said, limited supply is likely to offer the market some support. 

U.S. Economic Data/News

  • After weeks of back-and-forth, Vladimir Putin ordered Russian troops into two breakaway regions of Ukraine after they recognized their independence. This move threatened to scrap peace negotiations with the West.
  • Mixed messages from the Fed officials likely fueled additional volatility. St. Louis Fed President James Bullard said in a recent interview that the Fed’s credibility was on the line and that he expected the fed funds rate to be 1% higher by July. However, the recent Fed minutes were generally more dovish and suggested that a 50-basis point rate increase out of the gate was unlikely. 
  • Underwhelming economic data could also lessen the likelihood of a higher magnitude rate hike to start. Weekly jobless claims rose last week for the first time in over a month while several regional manufacturing indexes also surprised to the downside. 
  • On the flip side, retail sales rose more than expected although higher inflation likely accounted for a large portion of the gain, mitigating the significance of the increase. 

International Economic Data/News

  • European Central Bank (ECB) President Christine Lagarde and governing members talked down rate hike expectations and noted that any monetary policy adjustments would be gradual and reflect key economic data at the time. 
  • UK inflation touched a 30-year high in January contributing to expectations that the Bank of England will introduce its third consecutive rate hike in March. Payrolls also rose and the local unemployment rate to fell to 4.1%. 
  • Japan’s economy recently returned to growth over the fourth quarter of last year, boosted by robust private consumption amidst falling coronavirus cases. The government is also planning to ease additional pandemic restrictions which were among the strictest in the world. 
  • Chinese officials have reportedly pledged to roll out several measures to help support their slowing economy. The top finance minister also vowed to cut corporate tax rates and strengthen targeted fiscal spending. With many other global central banks are tightening policy, China is one of the few areas of the world with increasingly accommodative government economic assistance. 

Looking ahead…

Tuesday, February 22, 2022

  • US Manufacturing PMI
  • US Services PMI

Thursday, February 24, 2022

  • US GDP

Friday, February 25, 2022

  • US Core PCE (Inflation)
  • US Personal Income

Sources: The WSJ, T. Rowe Price Global Markets Weekly Update

This commentary was written by Craig Amico, CFA®, CIPM®, Associate Director, Noreen Brown, CFA®, Chief Wealth Strategist and Steven Melnick, CFA®, Associate Director at Summit Financial, LLC., an SEC Registered Investment Adviser (“Summit”), headquartered at 4 Campus Drive, Parsippany, NJ 07054, Tel. 973-285-3600. It is provided for your information and guidance and is not intended as specific advice and does not constitute an offer or solicitation to buy any securities mentioned. Summit is an investment adviser and offers asset management and financial planning services. Indices are unmanaged and cannot be invested into directly. The periodic returns are represented by the following indices: large-cap value by Russell 1000 Value TR Index, large-cap blend by Russell 1000 TR Index, large-cap growth by Russell 1000 Growth TR Index, mid-cap value by Russell Mid Cap Value TR Index, mid-cap blend by Russell Mid Cap TR Index, mid-cap growth by Russell Mid Cap Growth TR Index, small-cap value by Russell 2000 Value TR Index, small-cap blend by Russell 2000 TR Index, and small-cap growth by Russell 2000 Growth TR Index, international developed by the MSCI EAFE NR USD Index, Emerging Markets by the MSCI EM NR USD Index, U.S. Aggregate Bond by the Bloomberg US Agg Bond TR USD Index, U.S. Municipals by the Bloomberg Municipal TR USD Index, and Corporate High Yield by the Bloomberg US Corporate High Yield TR USD Index. The S&P 500 Index is a market capitalization-weighted Index of 500 widely held stocks often used as a proxy for the stock market. It measures the movement of the largest issues. Standard and Poor’s chooses the member companies for the 500 based on market size, liquidity, and industry group representation. Included are the stocks of eleven different sectors. The Nasdaq Composite Index is a large market capitalization-weighted index of more than 2,500 U.S.-domiciled stocks. The index’s composition is heavily weighted to the information technology sector, with consumer services, health care, and financials the next most prominent industries. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index representing approximately 90% of the total market capitalization of that index. It includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 3000 Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market. It is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected. The MSCI EAFE Index (Europe, Australasia, Far East) captures large- and mid-cap representation across developed markets countries around the world, excluding the U.S. and Canada. The index covers approximately 85% of the free float-adjusted market capitalization in each country. The MSCI Emerging Markets Index captures large- and mid-cap representation across emerging markets countries across the world. The index covers approximately 85% of the free float-adjusted market capitalization in each country. The MSCI Europe Index captures large- and mid-cap representation across developed markets countries in Europe. The index covers approximately 85% of the free float-adjusted market capitalization across the European developed markets equity universe. The MSCI China Index captures large- and mid-cap representation across China A-shares, H shares, Red chips, P chips, and foreign listings. The index covers about 85% of the China equity universe. The Nikkei 225 Index is a stock market index for the Tokyo Stock Exchange which is price-weighted operating in Japanese Yen. The index measures the performance of 225 large, publicly owned companies in Japan from different industry sectors. The Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS, and CMBS (agency and non-agency. The Bloomberg Municipal Bond Index covers the U.S. dollar-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. The Bloomberg U.S. Corporate High-Yield Index measures the U.S. dollar-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on the EM country definition, are excluded. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The Caixin China General Services PMI (Purchasing Managers’ Index) is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 400 private service sector companies. The index tracks variables such as sales, employment, inventories, and prices. A reading above 50 indicates that the services sector is generally expanding; below 50 indicates that it is generally declining. The 5s30s spread is the difference between the yield on the 30-year Treasury bond and the yield on the 5-year Treasury note.
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