Sightline Weekly Market Update: Interpreting Last Week’s Rally
Equity markets rebounded last week, erasing much of the month’s decline. Investor sentiment was lifted by news that Russia and Ukraine were in talks to settle the conflict, falling oil prices, and Russia avoiding defaulting on an interest payment of sovereign debt. While some thought last week’s jump in equities was nothing more than a bear market rally, others felt the market had turned the corner after the recent correction. The TSX rose the least, rising 1.70% on the week as oil prices fell 5.2%. The Dow Jones managed a 5.5% gain on the week, the S&P 500 jumped 6.16%, and the Nasdaq catapulted 8.18% on widespread gains across all sectors. The S&P400 Mid-cap index advanced 5.3% and the Russell 2000 5.30%. European markets also rose on the hope of the Russia-Ukraine conflict settlement talks. The MSIC EAFE index rose 5.2% as Germany’s DAX, France’s CAC, Italy’s, FTSE MIB, and the UK FTSE 100 all climbed over 5% by week’s end.
Economic data for the week was mixed, kicking off on Monday with the Federal Reserve Bank’s Survey of Consumer expectations for inflation. The short-term and medium-term inflation expectations reversed some of January’s decline, rising to 6.0% and 3.8%. The survey reported spending growth expectations for next year increasing by 0.9% to 6.4% across all age groups, income levels, and education groups. The latest reading is a new series high.1
The Empire State Manufacturing Survey reported a decline for the first time since the early stages of the pandemic. The headline business conditions index fell to a negative 11.8, falling 15 points in March. The last time the reading was at the current level was May 2020. Orders and shipments were slightly lower, unfilled orders increased, delivery times increased significantly, and the prices paid index remained elevated. Labor conditions improved modestly with increases in employment and longer workweeks. Despite the latest survey, most companies remain optimistic.2 On Wednesday, retail sales rose 0.3% in February, slightly below expectations. Excluding autos, sales were up 0.2% with a significant reduction in online sales; however, gas sales rocketed higher driven by inflationary pressures. On a positive note, the January number was revised higher to 4.9%.3
Last Wednesday, the Federal Reserve approved the first-rate hike (0.25%) since December 2018. Further Fed officials indicated an aggressive track with rate increases at each of the next six meetings. The Fed has two goals, stable prices and maximum employment. With a strong job market and low unemployment rate, the Fed is now turning to inflation. In the statement from the Committee, the impact on inflation emanating from the Russia/Ukraine conflict is uncertain and will require close monitoring. Still, it is anticipated to create additional upward inflation pressure.4 Chairman Powell, in a press conference after the announcement, indicated that the Fed could start reducing the balance sheet by the next meeting in May and would be more aggressive than the $50 billion a month in previous balance reductions. With approximately $9 trillion on the balance sheet, the selling rate will have to be significantly larger than in the past to have a meaningful impact.5
The initial rate of jobless claims showed improvement last week, dropping 15,000 to 214,000 from the previous week. Claims for benefits in all programs also improved, falling 59,516 from the previous week to 1,968,544.6 Housing permits fell slightly from January but up 7.7% over February 2021. The seasonally adjusted housing starts came in at 1,769,000, a 6.8% jump over the revised January estimate and 22.3% above the February 2021 number.7
On Thursday, the Philadelphia Fed Manufacturing Survey came in at 27.4 versus the previous month of 16 and above market expectations of 15. The survey indicates general business activity and remains strong with rising employment and price indexes.8 On Friday, the Conference Board Leading Economic Index for February increased by 0.3%, partially off-setting January’s decline. The latest reading does not consider the impact of the Russian and Ukrainian conflict. 9
Investors are now considering if last week’s rally was a bear market rally or the start of a new move higher. Certainly, valuations are more attractive than they were three months ago. The economy is slowing but still growing faster than pre-pandemic levels. The labor market is strong, there are historically low interest rates, and consumers still appear to be willing to spend. These factors might lead one to believe equities should move higher for the remainder of the year. However, inflation and geopolitical events could derail equity markets and the Western leaders’ efforts for regime change in Russia could lead to continued volatility in equity markets.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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