Economic Market Summary

Market Down and Dirty

Last Week’s Economic/Market Summary

Data 

• U.S. equity indices showed strength last week with their best returns since February. 
  • S&P 500 +3.82% Dow +4.02%, Russell 2000 +2.42%, Nasdaq +3.61% 
    • The All-Country World Index gained 3.22%. 
  • S&P 500 sub-sectors were all positive last week. 
    • Technology led to the upside by a wide margin with gain of almost 6%. 
    • Utilities was the worst performer with a gain of 2.6%. 
  • The CBOE Volatility Index (VIX) collapsed almost 40% to close back below the critical 20 level. 

• US Treasury bond yields were higher last week as the aggregate bond market declined in value. 
  • US 2yr +0.07% at 0.65%, 10yr +0.14% to 1.48%, 30yr +0.19% to 1.87%. 
  • As expected, with strength in equities, the bond market saw significant outflows. 

• Commodities as an aggregate asset class were mixed last week. 
  • WTI Crude shot higher by 8.6%. 
  • Gold was flat at -0.03%. 
  • The US Dollar index was little changed at -0.07%. 

• In our opinion, U.S. economic data was mixed last week. 
  • The job openings report came in higher than expected while jobless claims were lower. 
  • November’s CPI inflation gauge came in at +6.8% which is the highest yearly gain since 1982. 
  • Consumer sentiment came in higher than expected. 

• An index of equities outside the US (FTSE All-World ex-US) gained 2.48%. 

Conclusion 

• Equity markets saw significant strength last week after 2 consecutive weeks of declines. 
  • Despite the new covid variant & the biggest yearly inflation rise since 1982, the S&P 500 powered higher to end at a fresh all-time high last week. 
  • Concerns over the omicron covid variant seemed to subside as institutional investors plowed money into equities. 
    • Hedge Funds, who slashed their equity exposure at the fastest pace since April 2020 during the prior 2 weeks, seemed to be back as the major source of demand for equities. 
    • This was even though data suggests this variant is 4.2x more transmissible than the delta strain was in its early stages. 
    • We remain cautious and will continue to watch worldwide gov’ts responses to this latest Covid variant. 

• S&P 500 subsectors were all positive last week as Tech led by a wide margin with a gain of almost 6%. 
  • Energy, Consumer Staples, Materials, Industrials, & Healthcare were up over 3%. 
  • Utilities, Real Estate, Consumer Discretionary, & Financials were up over 2%. 

• The lack of breadth in the participation of up moves of major equity indices remains a concern. 
  • 5 stocks accounted for 51% of the S&P 500’s return since the end of April. 
    • MSFT, GOOGL, AAPL, NVDA, TSLA 
  • Historically, drawdowns have been larger following narrowing breadth. 
  • However, despite this narrowing breadth, major drawdown risk appears it could be low in the coming months due to light positioning, strong earnings growth, & share prices already reflecting likely Fed tightening. 

• Non-US equities also moved higher last week as the US Dollar paused its run of strength. 
  • While Asian equities have mostly underperformed during the pandemic, good news could be on the horizon. 
  • Economists predict China will start adding fiscal stimulus in early 2022. 
  • This was after the country’s top officials said their key goals for the coming year include counteracting growth pressures to “ensure stability”. 
  • Chinese economic conditions and policy could be turning positive & supportive as a result. 

• Yields climbed across the curve last week in the US Treasury market. 
  • Despite the rise in Treasury yields, the real interest rate declined as inflation measures came in at their highest levels in almost 40 years. 

• The Federal Reserve will meet this week and expectations are for increased tapering of bond buying. 
  • They may also signal a quicker than expected increase to interest rates. 
  • Based on current positioning, the market sees the Fed having little ammo to hike before having to pause as a result of economic weakness.  
  • Additionally, the “breakevens” gauge of the bond market is suggesting that the Fed will be challenged to get inflation down toward its 2% target. 
  • As we’ve discussed at length, this is a tricky situation for the Fed and they remain a key input to our risk management process. 

Ryan A. Mumy, CFP®,
AIF® – Chief Investment Officer

Contact: 828/855-9400
info@CIASonline.com or rmumy@bloomberg.net 

 1 Source: Bloomberg – 2/25/2022

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