During the period, the Dow Jones Industrial Average returned -4.57%, the S&P 500 returned -4.95%, the Russell 2000 returned -7.80% and the Nasdaq 100 returned -9.08%. The U.S. 10Y Treasury Yield ended the quarter at 2.338%.
For the first time in two years, the pandemic was not the primary factor impacting the markets: in March, the Federal Reserve raised interest rates (the first increase since late 2018) in an effort to combat rising inflationary pressures. As a result, bond prices fell, leading to one of the worst quarters for fixed income securities. The Fed has been very transparent in their shift toward raising rates several times this year – the question now is whether a more aggressive policy needs to be considered. The Russian invasion of Ukraine has complicated these decisions, as it is unclear what impact this will have on rising energy and commodity costs. We believe that current conditions favor steady economic growth, stable corporate earnings, and slowly rising interest rates.
Previous periods of market volatility have demonstrated that trying to time the market is a difficult and typically underperforming pursuit. For long term investors, simply staying invested is the most prudent investment strategy. In addition, we encourage investors to manage risk by staying in their asset allocation range and maintaining a diversified portfolio.
The following are some technical indicators and themes that North Star tracks to get a sense of the health of the economy.
The US ISM Manufacturing Purchasing Managers Index (PMI) slowed, but is still considered expansionary, with a reading of 57.1.
Consumer Price Index and Producer Price Index readings were the highest in 40 years and March’s rate of 8.5% represented the seventh straight month of year-over-year increases. We believe this rate of increases is transitory.
The St Louis Fed’s Financial Stress Index remains low, as it did during the onset of the pandemic.
The US Dollar is at a multi-year high and remains the global reserve currency.
Commodity Prices (food and energy prices) have skyrocketed. According to our ECON 101 notes, “The cure for high commodity prices is high commodity prices.”
Jobs are strong. Total nonfarm employment rose by 431,000 jobs in March with January and February job numbers revised up by net 95,000 jobs for the two-month period. Over the past 12 months, the U.S. economy has added almost 6.5 million jobs. Unemployment rate fell to 3.6% in March, back at pre-pandemic lows. The labor force participation rate of 62.4%, despite gaining 0.1% in March, is still a full percentage point below its pre-pandemic level. Weekly new unemployment claims were at a record low of 202,000 by the end of the quarter.
Consumer Sentiment was trending lower than at the height of the pandemic (similar to the Financial Crisis of 08-09. Although it was announced two weeks after the end of the first quarter, March consumer sentiment unexpectedly jumped up 10% to a reading of 65.7 with the future expectations reading contributing largely to the increase.
Housing trends could be reversing after a period with very low mortgage rates and inventory shortages drove home prices higher. The impact of the recent jump in mortgage rates remains undetermined. Our research indicates historically that housing prices have held up even during periods where mortgage rates increased.
Corporate Profits dramatically exceeded expectations during the fourth quarter of 2021 and estimates for the first quarter of 2022 suggest a 10% year-over-year increase.
Disposable Personal Income/Spending/Savings are being impacted as the $1T in government transfer payments that occurred in 2021 will not reoccur in 2022. Overall, government transfers created a surge in disposable personal income which translated into more saving than spending.