Telemus Weekly Market Review March 14th - March 18th, 2022
There seemed to be a sigh of relief to the markets this past week as the S&P 500 shot higher by +6.2%. There was no overarching driver for the gains, aside from a more hopeful tone as causes for concern did not get worse. Conflict continues to ensue between Russia and Ukraine, however, the resumption of peace talks provided some optimism. The Federal Reserve started their campaign to raise interest rates, with markets calmed by the fact that rates only rose by a quarter of a percent. Lastly, the Chinese government provided assurances that it would support markets and recent regulatory pressures would soon ease. This gave a lift to emerging market equities after a brutal start to the week that included Hong Kong’s Hang Seng index dropping -10% early in the week, before concluding with a gain of +4.2%.
The focal point of the week was Wednesday’s announcement by the Federal Reserve that they were going to raise interest rates by 0.25%. This marked the lift off moment, or start of what is expected to be a prolonged cycle of rising rates. The Fed provides forecasts from the members of its voting body, the Federal Open Market Committee (FOMC) every three months. This past week the most recent projections were provided, where the average member of the FOMC expects six more quarter percent interest rate increases in 2022 and an additional percentage point more in 2023. Should this play out as expected, the Federal Funds rate would sit just below 3% by the end of next year.
Interest rates ended the week higher, reflecting the revised forecast out of the Federal Reserve. In fact, yields on 5-year and 10-year Treasuries were nearly identical at roughly 2.15% to finish the week. The yield curve has become fairly flat, with only a 0.21% difference in yield between 2-year and 10-year Treasuries. Having short-term rates increase more than long-term is not unusual during Federal Reserve hiking campaigns. However, the level of flatness would indicate to us that market expectations are for aggressive Fed actions to eventually lead to a slowdown in economic growth, if not a recession.
The relief rally in stocks was a much needed respite for equity investors. Following this past week’s recovery, the S&P 500 is down -6.1% year-to-date, having been down as much as -12% after Monday’s close. Technology shares were well bid gaining +8.1% with communication services not far behind. On the other end, the energy sector slid -3.2% as crude prices continued to give back their speculative gains from earlier in the month.
This past week’s rally provided some respite, reflecting the fact that valuations have become more reasonable, and some stocks have hit oversold territory. However, we continue to expect markets to be volatile and do not yet believe we are at a point where it’s prudent to take on added risk. We know there will be more interest rate increases on the horizon. The conflict between Russia and Ukraine continues and tensions remain elevated. Inflation pressures have not abated, and we are anxiously looking toward first quarter earnings announcements where companies may provide more color on whether higher prices are beginning to impact their outlooks for the year.
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The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 4.6 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization. The Hang Seng Index (HSI) is a stock market index in Hong Kong. It records and monitors the daily changes in stock prices of the 50 largest Hong Kong stock market companies. As the companies represent almost 60% of the Hong Kong Stock Exchange, the Hang Seng Index is the main indicator of the Hong Kong market’s overall performance. An index is not a security in which an investment can be made, as they are unmanaged vehicles that serve as market indicators only and do not account for the deduction of management fees and/or transaction costs generally associated with investable products.
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Matt joined the Telemus team in 2018. As Chief Investment Officer, he leads the firms the investment process and research effort. Matt has experience as an equity analyst and portfolio manager and has advised corporate pension plans on their manager selection. He’s been quoted in Money Magazine and Barron’s.