February Market Recap
March 1, 2022
A stock market already struggling to find its footing was dealt another blow in February.
Russian President Vladimir Putin’s unprovoked invasion of Ukraine not only lit the fuse on geopolitical tensions, it increased the blood pressure of investors around the world wondering how the conflict will affect the course of global financial markets in the year ahead.
Stock prices sank lower across the board last month, but were trending lower for most of February even before Russia’s build-up of military troops escalated into a full-scale war. Similar-looking losses for the major equity indices (all between 3-4%) are indicative of a selloff triggered more by macroeconomic developments than by company (or sector) specific news.
For the second consecutive month, 10 of the 11 sectors in the S&P 500 were negative. And for the second straight month, Energy (+6.4%) was the lone exception. Health Care (-1.1%) and Industrials (-1.1%) also outperformed. Communication Services (-7.0%), Real Estate (-5.1%), and Technology (-5.0%) suffered the largest losses.
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The consequences of war can be exceptionally difficult to quantify.
Financially speaking, it was the details and depth of economic sanctions against Russia that drove market movements in the final week of February. The initial wave of sanctions, deemed less aggressive than expected, led to a relief rally on February 25. When stiffer sanctions from a larger coalition of allies were announced a few days later, stock prices sold off dramatically.
Russia is interesting in that it holds enormous political influence, is the largest country in the world by landmass, and (as a major supplier of oil to Europe) plays a serious role in global energy markets.
That said, the Russian economy represents less than 2% of global GDP. Italy’s economy is twice the size. Poland exports more goods to Europe than does Russia. That context is important when considering the expected impact of new economic sanctions on global supply chains, commodity prices, and revenue streams.
As of market-close on February 28, the S&P 500 had fallen 9.2% from its all-time high. The NASDAQ finished the month 15.2% below its highwater mark. Small-cap stocks outperformed in February. The Russell 2000 gained 1% for the month, but remains nearly 17% below its November 2021 high.
Expect the market’s focus to shift back toward the Fed in March when Jerome Powell formally announces the central bank’s first rate-hike of 2022. To be clear, high inflation and the expectation of rising interest rates remain far more significant to the market’s direction than the military conflict in Ukraine. One counterbalance of the recent weakness in equities is that the Fed will almost certainly avoid a larger 0.50% rate increase in March.
Valuations of US equities have already fallen considerably. Since the S&P 500’s all-time high in early January, its forward P/E ratio has fallen 14%. Valuations, in other words, have decreased even more than stock prices. In the final week of February, the S&P’s forward P/E (18.5) fell below its 5-year average for the first time since April 2020.
Year-over-year inflation accelerated to 7.5% in February (up from 7% a month earlier). Bond yields also reached their highest levels in 2 ½ years. The 10-year US Treasury yield rose above 2% for the first time since July 2019 before retreating. The 10-year yield ended February at 1.84%.
Corporate earnings remain incredibly resilient. Blended earnings for S&P 500 companies rose more than 30% in Q4 2021, the fourth consecutive quarter in which earnings grew at least 30%.
As bonds yields move higher, so too have US mortgage rates. The average interest rate on a 30-year loan was just over 4% as of month’s end.
West Texas Intermediate Crude oil topped $100 per barrel in late February, the first time that has happened since 2014. It finished the month just under $96 per barrel.
With oil prices spiking, US gasoline prices rose to a national average of $3.61 per gallon.
Gold rose 6.1% to its highest price in 14 months.
Investment Advice offered through Marks Group Wealth Management, a Registered Investment Advisor.
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