This bi-weekly financial section is published in USA Today's: The Town Journal. This publication is distributed in Bergen County New Jersey, covering 4 towns with roughly 22,000 residents.
US MARKETS DIP AND THEN RIP
US Markets
Last week was incredibly wild for market participants. The trading week was fraught with volatility inducing headlines. These headlines caused precipitous selloffs and stunning upside reversals. All of this action was jam packed into just four days of trading since the markets were closed on Monday, 02/21, to celebrate Presidents Day.
The classic sell-the-rumor and buy-the-news dynamic played out. US markets sold off Tuesday into Thursday morning as rumors of war abounded. Thursday and Friday saw buyers lift the markets, and most market averages closed the week with modest gains. The S&P 500 finished with a gain of 0.81%. The tech heavy Nasdaq 100 finished with a gain of 1.25%. The Dow Jones Industrial Average finished with a loss of 0.06%. The Russell 2000 small-cap index finished with a gain of 1.52%.
Market Moving Headlines
Markets sold off to start the week. The headlines blamed recent market volatility on the Federal Reserve. This is because market participants are anticipating the Federal Reserve will begin its battle with, the now rampant, inflation by reducing their bond purchasing, decreasing the amount of assets on their balance sheet, and by raising the Effective Federal Funds Rate as early as next month.
The financial news-media has a convention for labeling market declines as follows: A decline of less than 10% is a pullback. A decline of 10% - 20% is a correction. A decline of 20% or more is a bear market. While market Technicians scoff at these informal definitions, the mid-week headlines were about the S&P 500 and Dow Jones Industrial Average entering correction territory while the tech focused Nasdaq 100 headed towards bear market territory.
As market participants slept Wednesday night, President Putin signaled the Russian invasion of Ukraine with a chilling speech in which he warned that any entity attempting to interfere with Russia’s invasion will experience “consequences greater than any you have faced in history.” As the markets continued to sink early in Thursday’s session, President Biden addressed the nation. As he spoke, the markets began a massive rally which continued through Friday’s trading session and erased the majority of the week’s earlier losses.
Russia’s invasion of Ukraine matters to market participants because Russia and Ukraine play a major role in the world’s economy through its exports. Russia is not one of the 13 countries that has a membership in The Organization of the Petroleum Exporting Countries, OPEC, though it does export billions of dollars worth of crude and refined oil, as well as petroleum gas to countries around the globe. Russia is also one the world’s largest exporters of nitrogenous fertilizer which is used to grow food crops globally. Russia and Ukraine together export more than a fifth of the world’s corn and wheat. They are also amongst the world’s largest producers of palladium and lithium metals used in the manufacturing of many things from automobiles to computers to blood sugar test strips. The fact is that many countries, including the US, rely heavily on Russia’s exports. This makes it extraordinarily difficult for world powers to sanction Putin as a punishment for his actions. Doing so will worsen the already entrenched inflation for the US and many nations worldwide.
Where does all of this leave the US equity markets? While the recovery at the end of last week had encouraging implications for market internals such as breadth and momentum, we will take it day-by-day with an unbiased and open mind. Market technicians focus on the message from price charts. We focus on the facts and stay aligned with the data. We use that data to create a probabilistic framework of scenarios about the future. Price might continue to push upwards and test earlier all-time highs. Price might continue to push upwards and then stay rangebound. Price might stall here and stay rangebound. Price might sink downwards. Future price action is largely unknowable.
International markets
In a change of character for 2022, last week US equites outperformed the world including emerging, frontier, and developed markets.
Emerging markets sank, led by Russia which finished down over 32%. We did see continued strength under the surface in emerging markets from Latin American markets including Chile, Columbia, and Brazil. We also saw strength from Indonesia in Asia. In developed markets, we saw gains led by Norway, New Zealand, and Denmark.
Fixed Income
Bonds continue to sell off across the entire landscape year-to-date. US and international bonds are, on the whole, down between 4% to 5% this year. Last week the selloff continued, though we did see buying in both domestic and international Treasury Inflation Protected Securities, TIPS, which matches the expected persistent inflation narrative. We also saw some buying in US high yield bonds, aka junk bonds. We will stay focused on the fixed income market as this selloff might change quickly, especially if stocks continue to sell off. Money must go somewhere when it flows out of equities, remember commodities too, and with many bonds testing critical price levels there is an increased probability that a mean reverting bounce might lift bonds in the near term. The US 10-Year Treasury Yield rose to 1.98%.
Commodities
Commodities had another strong week as energy and base metals led the indices higher while the US dollar continued to rise. The USD finished the weak up at $96.62.
The energy complex largely showed gains last week. Brent Crude Oil blasted up to almost $106 per barrel as Russia invaded Ukraine on Thursday, though started to retreat as President Biden spoke and revealed he would not impose any sanctions on Russian oil exports. Brent closed up for the week, though well below its high, at $97.93 per barrel. Domestic oil, WTI, closed higher as well, after following the same pattern as Brent, blasting to over $100.50 Thursday morning and then retreating to close the week at $91.59 per barrel. Natural gas and gasoline both closed higher as well.
Base metals closed higher lead by steel and aluminum, but notably copper was down 0.44%. Precious metals were mixed as palladium pulled and platinum dragged. Gold closed at $1,888 per ounce.
Amongst agriculture commodities, softs closed lower though lumber gained. Grains were led higher by wheat. Livestock commodities finished lower with large losses in lean hogs.
The Week Ahead
The week ahead will undoubtedly continue to show market participants volatility driven by the news-media. President Biden is scheduled to deliver his State of the Union Address on Tuesday 03/01. Federal Reserve Chairman Powell is scheduled to give his semi-annual monetary policy update before the House Financial Services Committee on Wednesday, 03/02, followed by an appearance before the Senate Banking Committee on Thursday. His testimony will hopefully illuminate the Fed’s position ahead of the next FOMC meeting of Fed policymakers scheduled for March. There is also an OPEC meeting on Wednesday, 02/02.
On the labor front, we have Payroll provider ADP’s latest National Employment Report on Wednesday 03/02, ahead of the Labor Department’s nonfarm payrolls report for February on Friday, 03/05. We also have some notable earnings reports being from released from companies including Target, Kohl’s, Kroger, Best Buy, and Costco.
It is a very intense time in history as we witness the hell that is war. As Putin flexes his ego, we see grandmothers being physically abused and thrown into Russian prisons for sharing their feelings. We see families ripped apart in Ukraine as male citizens are forced to pick up arms as their wives and children flee to safety. We see citizens huddling underground in sleeping bags as they pray the subway stations will keep them safe from the horrors above. It is my sincere hope that these scenes will have an impact on my fellow Americans. These scenes must remind citizens that while the United States of America is far from perfect, we are privileged in that we are provided unmatched freedom and safety which we must cherish, appreciate, and protect.
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