Month in Review: March 2022

While the bounce in the back half of March felt like a recovery, the upside move was limited to U.S.
equities and commodities while fixed income markets posted a fourth consecutive month of losses and
international markets struggled through a backdrop of the war in Ukraine. Volatility across equity and
interest rate markets remained elevated with the war and the removal of monetary policy
accommodation the key drivers.
U.S. equities (+3.48%) led the way in March with global ex-U.S. (+1.16) markets posting more modest
returns driven by commodity oriented geographies of Brazil, Norway, Denmark, Australia, and Canada.
COVID-19 lockdowns across China took mainland Chinese stocks down 8% and overall emerging markets
down 2.3% while economic risks stemming from the war in Ukraine pressured European equities to a
1.7% decline. The same war that pressured European equities resulted in Russian equities being
excluded from all standard indexes, effectively disappearing from the global equity market landscape.
Large cap stocks outperformed small caps and from a style/sector standpoint, value outperformed
growth led by energy, materials, and utilities.
Commodity markets benefited from supply disruption stemming from the Russia-Ukraine war and a safe
haven/inflation bid for gold. WTI oil (+4.76%) closed above $100 while natural gas surged 28%.
Commodity gains were broad based during the month with grains, industrial metals, and precious
metals participating in the rally.
From an economics and earnings perspective, the landscape looks relatively encouraging with the
glaring exception of the prevailing global inflationary conditions. The labor market is very tight with
unemployment nearly back to pre-pandemic record low levels. Both the services and manufacturing
sectors are solidly in expansionary territory with robust levels of activity while restrictive Covid health
policy measures have largely disappeared with China’s zero tolerance policy the only material global
outlier. As we move into the first quarter earnings season, the S&P 500 is estimated to post 4.5% profit
growth with a good possibility of hitting a fifth consecutive quarter of over 10% once earnings beat rates
and margins begin to take shape.

Market Anecdotes

• In what Bespoke coined the ‘immaculate correction’ we’ve seen earnings estimates rising with stock prices (and multiples) falling, reflecting a relatively constructive forward runway translating to P/E multiple compression given the Fed tightening cycle and prevailing geopolitical risks.
• Across twelve separate Fed speaking engagements, officials made clear the need for rates to reach neutral and move into restrictive territory, while maintaining flexibility along the way.
• A key decision point for the economy and stock market will be what level is the true ‘neutral rate’ of interest. Is it the FOMC’s terminal rate of 2.4% or is it closer to 3-4%? Stock markets would appreciate the Fed halting hikes below the neutral rate in the short term, policy would eventually have to counteract remaining too stimulative in the long-term

• Strategas increased the percentage likelihood of recession to 35% due to the economic impacts of Fed tightening, higher rates, inflation, supply chain disruptions, and commodity price shocks. Meanwhile, yield curve slopes and economic data continue to paint a constructive picture.
• European policy makers will attempt to offset the impact of the Ukraine crisis through looser fiscal spending and U.S. lawmakers have reopened the door to negotiations on the reconciliation package in a slimmed down version of the initial $3.5t proposal but several roadblocks remain.
• The BCA geopolitical team is assigning a high likelihood that China will help Russia manage U.S. sanctions leading to U.S. sanctions on China later this year.
• Sector leadership across the U.S. markets so far in 2022 is basically energy then everything else, a mirror image and clear departure from the technology led market over the past three years.
• U.S. equity markets falling and rising over 10% in a quarter is both very rare and perhaps (historically?) a positive setup to the coming months.
• While the stock market bounced sharply higher over the last two weeks of March, the bond market did not. Bianco Research noted March was the eighth consecutive month of losses for The Global Aggregate Index.
• March saw an inversion of the 2yr/10yr slope, triggering much hand wringing and recession talk. The reliability of the indicator and equity market performance following inversions are mixed at best.

Economic Release Highlights

• The March employment report showed payrolls increasing 431,000 (490,000 expected), taking the U3 unemployment rate down to 3.6% and the U6 unemployment rate down to 6.9%. Labor force participation edged up 0.1% to 62.4% – a tight labor market with supply in wait.
• The February Personal Income and Outlays reported personal income (0.5%a vs 0.5%e) and expenditures (0.2%a vs 0.5%e). YoY headline (6.4%) and core (5.4%) inflation were in line while MoM came in at 0.6% and 0.4%, respectively.
• Eurozone inflation jumped to 7.5% in March, well in excess of the 6.7% consensus estimate and largely due to a 44.7% spike in energy prices.
• The March Consumer Confidence reading of 107.2 was in line with consensus of 107.0.
• UofM Consumer Sentiment survey reading of 59.7 for March was a 3.1-point drop and below consensus expectation of 61.7.
• The Case-Shiller Home Price Index rose 1.8% in January, slightly ahead of consensus expectations for 1.4%. The YoY rate of appreciation was 19.1% versus an 18.4% consensus.
• U.S. Housing Starts (1.769mm), Housing Permits (1.859mm), and Existing Home Sales (6.020mm) were relatively in line with expectations.
• The March Housing Market Index fell just short of expectations at 79 versus consensus of 81.

• March ISM Manufacturing and Service index readings remained in expansionary territory but both slightly short of consensus (57.1 v 59.0, M) (58.3 v 58.5, S)
• Final Markit PMI data readings (C,M,S) for March across the U.S (57.7, 58.8, 58.0), EU (54.9, 56.5 ,55.6), and global (52.7, 53.0 ,53.4) showed a mix bag of results with the US slightly underperforming while EU readings beat consensus.
• China PMIs (C, M, S) of 48.8, 49.5, 48.4 fell into contractionary territory.