Selling Pressure

Market volatility continued throughout February, especially late in the month, as investors responded to the ramifications of the ongoing Ukraine-Russia crisis. Such reactions resulted in the S&P 500 closing down more than 10%, constituting a correction, in the middle of last week, yet would later rally to finish the week. Overall, US equities have been under modest selling pressure and closed February down 3%, a consecutive month of losses.

In fixed income, the US 10-Year Treasury yield broke above the symbolic 2% level earlier in February for the first time since mid-2019. As investors sought the safety of bonds at the end of the month, prices rose, resulting in yields falling back down.

In commodities, oil surged above $105 a barrel for the first time since 2014 on the invasion as investors analyzed how it would impact the oil supply chain.

Our Perspective

Rising risks have been on our radar for some time now as the market rapidly progresses through its economic cycle. While heightened geopolitical tensions have led to some selling pressure, the selloff we have experienced year-to-date is not out of historical norms.

As always, we are closely monitoring all market influences, with great attention on the Russia-Ukraine crisis, but have yet to see anything that warrants significant changes to the portfolio at this time. Should the selloff worsen, our inclination, as has been the case throughout our history, would be to add into weakness.

Today, the economy remains strong; equities, while falling at the moment, have been on an extraordinarily strong run and are still higher year-over-year; and the Fed is actually about to start tightening, not easing. These indicators and others give us a healthy dose of caution at this time.

For more on Ukraine-Russia, please see our in-depth analysis Russia Reignites the Rivalry, published shortly before the invasion.

Looking Back on China’s Potential

In the years since China hosted the 2008 Summer Games, it has seen continued economic growth and evolution, although the journey hasn’t been without hurdles. High debt levels and an aging population have caused a shift in economic policy approach. Now with a second Olympic games over, what does the future look like for this emerging market?

Our Perspective

China’s potential to become an economic superpower has been only partially tapped. While the country has made a name for itself since joining the World Trade Organization in 2001, it still has strides to make in global relations and human rights as it seeks to transition into a stable, wealthy economy.

For more, see our recent blog, 14 Years Later: How China Has Evolved Since It Last Hosted the Games.

Pandemic Stocks & Reason

A variety of pandemic darling stocks have emerged from the new habits and lifestyles caused by quarantines. At-home gyms and streaming services are two categories heavily impacted by these trends. Fast-forward, stocks (i.e., Peloton) that were swept up in excess hope, have seen sharp selloff.

Our Perspective

Investing must involve discipline and rigor, with decisions based on deep analysis into individual securities, their fundamentals, and their fit alongside your total portfolio, not action based on hyped-up headlines. An added benefit is that this analysis in useful in helping provide a degree of protection against impulse buys. Just because we like a company, doesn’t mean we like its stock.

Read more including our decision to not buy into certain hot stocks in the ‘Pandemic Darling Stocks Meet Today’s Market’ blog.

Our View
Economic Cycle		Economic growth remains unphased, and the economy is moving later cycle with speed; many countries are now lapping their fiscal spending programs, causing the massive liquidity tailwinds to begin to dissipate
Stock Market		US stock market volatility has dramatically picked back up with equities reaching correction territory in February; they remain below all-time highs; valuations are still elevated and there are a variety of rising risks that warrant monitoring
Bond Market		Interest rates have risen well of their lows reflecting shifting expectations on inflation, growth, and central bank policy; corporate and municipal bond credit spreads remain historically tight
Foreign Exchange		While we believe the dollar may weaken longer-term, in the short-term, it is difficult to make the argument that currencies will swing significantly; the rise in geopolitical tensions has only increased uncertainty or made the environment less clear in the near or medium term
Important Issues on the Radar		COVID-19: the worst of this economic crisis is behind us, and with multiple waves of the virus, including the Omicron variant, the attention is shifting to learning how to live with the virus; potentially impacting recovery, financial markets and currencies regionally
		Ukraine-Russia War: we believe an environment of elevated geopolitical risks over the coming months would entail a general risk-off environment; lending upward support to the dollar, gold, and commodity prices
		China’s Economy: China is an outlier regarding policy and has shifted to a gradual loosening stance while most of the developed world begins to tighten; debt and property markets remain major issues; trade tensions continue to impact global trade and supply chains
		Inflation: a confluence of massive policy stimulus, tight labor markets, gummed-up supply chains, and rising energy costs are causing inflationary forces to broaden and become more entrenched than previously expected

Sources: Wall Street Journal, Refinitiv.

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