Uncertainty continues to weigh on equity markets, with the S&P 500® Index having lost in six of the previous seven sessions, now down 11.6% for the year. 2022 marks the fourth weakest start to a year for the S&P 500 on record, per Compound Capital. It is encouraging, yet counterintuitive, that in the previous five worst starts, the index made a tremendous rebound for the remainder of the year, including 49% in 2009 and 37% in 2020. Investor sentiment remains weak, with the CNN Fear & Greed Index at 13 on a scale from 0-100, and bears outweighing bulls by nearly two-to-one in the AAII Sentiment Survey. Below the surface, however, attempted rallies on limited news are a reminder that the buy-the-dip mentality of investors remains.
The selloff in Treasuries continues ahead of this week’s highly-anticipated FOMC meeting, with the 10-year Treasury touching the highest level since July 2019 at 2.07%. Retail fund flows have steadily shifted from fixed income to equities this year, and now rebalancing from institutions could accelerate the transfer. The Fed is widely expected to raise the Fed Funds rate by 0.25% at the meeting, though investors will closely watch the statement and the “dot plot” for clues on future actions. It is rare for the Fed to begin raising rates in a period of slowing growth and/or geopolitical tension.
Every day that goes by without markets aggressively selling off in the face of bad news is actually encouraging because it means we’re one step closer to pricing in these head winds. When negative news no longer drives markets lower, the door is open for a positive catalyst to push markets higher. In a way, investors are successfully biding their time until a resolution is reached in Ukraine.
Inflationary pressure remains intense, with February consumer price inflation at 7.9%, the hottest reading since 1982. The volatile food and energy space contributed to the surge, though core CPI was also at the highest level since 1982 at 6.4%. Despite strong wage growth, real wages fell by 2.6% from a year ago, impacting purchasing power, but not yet impacting demand. There is no relief in sight, with a substantial move in commodity prices in the first half of March. Thursday’s report on producer prices will be closely watched, as a reading well ahead of CPI would indicate pressure on company margins.
Conflicting messages continue to emerge from Ukraine, with simultaneous reason for optimism and caution. Ukraine President Zelensky expressed hope for a diplomatic solution, with word of a potential meeting between him and Russian President Putin. Officials in the U.S. said that Russia is requesting weapons from China for the invasion of Ukraine, though China dismissed it as “disinformation.”
Supply chain disruption continues to be a concern, with Chinese officials putting the 18 million residents of Shenzhen into lockdown on a surge in infections. This joins lockdowns in other parts of the country that, in total, account for nearly half of the economy. The government cut the required reserve ratio and interest rates in a move to stabilize growth, while technology stocks in China continue to come under pressure on de-listing concerns and geopolitical pressure. Chinese stocks in Hong Kong had their worst day since the financial crisis.
What to Watch
Wednesday’s FOMC meeting will be the primary focus of investors this week, though the reading on PPI Tuesday could also move markets. Other economic data include retail sales on Wednesday, housing starts and industrial production on Thursday, and existing home sales and leading indicators on Friday.
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