Watch the CPK Market Action Report: March 2022
Markets are having a pretty rough start to the year as the Federal Reserve looks to initiate quantitative tightening to control inflation that’s hit a 40 year high in addition to an unprovoked invasion of Ukraine by Russia that could have a dramatic impact on the cost of commodities all around the world. How big is the risk and how long will the selloff last?
Watch the Market Action Report now:
CPK Wealth Market Action Report
March 2022
INTRO TAG
Markets are having a pretty rough start to the year as the Federal Reserve looks to initiate quantitative tightening to control inflation that’s hit a 40 year high in addition to an unprovoked invasion of Ukraine by Russia that could have a dramatic impact on the cost of commodities all around the world. How big is the risk and how long will the selloff last?
That action starts, NOW!
INDEX PERFORMANCE RECAP
Index performance in February was almost a clone of January with a late month rally that fell well short of covering the collateral damage from earlier in the month. The Dow Jones Industrial was down -3.58% and the S&P 500 lost -3.22%. The Nasdaq again was the biggest decline for the month down -3.68%.
EQUITY UPDATE
Equities have been in a choppy but steady decline since last October-November time period. As I explained last month, due to the lengthy deployment of quantitative easing by our government, the U.S. economy and stock prices have become exceptionally hot. When this happens, we usually feel it in higher prices of goods and in general the cost of living as we do now. To get it under control, the Fed had to first stop their massive bond buying program and then start raising interest rates, which they are about to start doing. All of this has triggered a large-scale sell-off in stocks with 70% of the S&P 500 down more than 10% from their 52-week high including over 200 stocks that have dropped over 20% as of February 23rd. This is even more evident in the tech and consumer discretionary sectors where 9 out of every 10 stocks are down more than 10% from their 52-week highs. Russia’s invasion of Ukraine has now added to the selloff for a multitude of reasons, and I do not expect that we will see much relief until we see what the world is going to do to stop Russia. Since I do not see this conflict impacting the Fed’s decision to raise rates, we should be expecting higher inflation, slowing growth due to high commodity prices and a tightening Fed. This will not be a fertile environment for stocks if it continues.
BOND UPDATE
The bond market saw a strong upward movement in yields through mid-month when Russia made their move into Ukraine causing all of them to reverse course and only close slightly higher for the month. The 5yr note closed at 1.72% while the 10yr closed at 1.89%. The 30yr closed at 2.18%.
The 10yr note has been declining since the start of the Russia/Ukraine conflict and is now within 40 basis points of the 2yr. This spread will be a very important barometer to watch as the Fed tries to thread the needle of raising rates to overcome the rapidly rising inflation without inverting the 10/2yr yield curve which would ultimately stimulate concerns of a pending recession.
COMMODITY UPDATE
Crude oil posted another big gain closing out at $96.00 a barrel due in part to the events unfolding between Russia and Ukraine. Although energy prices generally rise during conflicts of war, Russia is the world’s largest exporter of oil behind Saudi Arabia and the second largest producer of natural gas. So, as the world puts more sanctions on Russia, it is assumed energy prices will rise globally, especially since OPEC+ is not looking to increase production at this time.
As for metals, investors are took a risk off in light of the conflict. Copper closed out the month slightly higher at $4.49. The tight trading range between $4.45 and $4.55 will likely continue until we see some resolve in the Russia/Ukraine conflict as well as economic growth relative to inflation trends.
Gold spiked during the month before slightly pulling back at the end of the month to close out at $1908/oz. The short-term trend in gold remains bullish with key support around $1870 and an upside target of $1947.
CURRENCY UPDATE
After a brief move to the downside early on, the US Dollar rebounded during the second half of the month before retracing some of its gains in the last couple days to close out at $96.71. If the Russia/Ukraine conflict worsens, I would expect to see a short-term rally in the greenback as capital from around the world will be looking for safety. However, it is unlikely the dollar will be able to rise much from its current level in response to the Fed’s QE tapering plans.
ECONOMIC UPDATE
Economic data for the month of February will keep the Fed on course to hike rates in March and for the next several months even with the increased geopolitical uncertainty. A low jobless claims number, strong consumer sentiment and a beat on corporate spending and investment were precursors to the February flash PMI at 56, a much higher reading than the expected 51.9. These all show there was clearly strong economic activity and it needs to continue to keep stagflation fears at bay.
THE WRAP
Last month, the big talking point was inflation and the Fed’s next steps to curb it. Now, here we are talking about an unprovoked invasion of Ukraine by Russia. This new twist may very well increase inflation both here on our shores as well as around the world and ultimately slowing the global economy. This will make the job of the Fed to try and raise interest rates even more difficult to execute.
The global response and isolation of Russia has increased and is now at unprecedented levels, including removing some Russian banks from SWIFT, the closing of international airspace to Russian planes, sport boycotts, etc.
This “cutting off” of Russia from the global banking system, global financial system and, broadly, global society, has had material impacts in Russia as the ruble crashed another 30%, while the Russian central bank doubled interest rates to 20% to try and halt widely reported bank runs in the country.
While necessary, these unprecedented sanctions raise the risk of financial contagion. Russia is a big economy that is totally interconnected to the global financial system and “cutting them off” does risk ripples hitting the European banking system and other global markets.
So far, though, there are no material signs of contagion, and it appears the situation is making some progress towards a cease fire.
However, let me remind you, our Federal Reserve is walking a very thin tight rope. They have left rates at zero for too long and now are facing the challenge of how to increase them to control inflation in light of a slowing economy and avoid causing a recession. However, if they don’t raise rates, the Fed could be left in a very difficult position should our economy continue to slow for an extended period and need additional stimulus.
CPK FOCUS
For the month of March, the cash allocation in our equity models remains between 30% and 40% due to the model’s more aggressive nature. Again, I am proud to say that this approach has kept our performance right in line if not better than the major index’s year to date. Our broad focus remains on Domestic Equities and Commodities.
For Domestic Equities, our focus is on Mid Cap Value, Mid-Cap Blend and Small Cap Value with an emphasis in the Energy, Financials, Technology, Basic Materials and Industrial sectors.
As for Commodities, our focus remains on Energy and Industrial Metals.
CPK DISCLAIMER
As a reminder, my current allocation is not a recommendation. Regardless of what happens next, investors like you need to have a simple and yet solid financial plan that reduces RISK, COSTS and TAXES while securing the necessary income you need to maintain your lifestyle throughout retirement.
If you don’t have a plan OR you’re not comfortable with the plan you have, call me today to get pointed in the right direction.
I’m Chad Kunc and that puts a wrap on the March 2022 Market Action Report. Thanks for joining me. It’s time for me to get back to the markets.
For this guy, that action starts, NOW!