Stock Market Remains Volatile as Investors Wait on Federal Reserve

Monthly Market Update
Written By Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

February Market Summary

  • The S&P 500 Index produced a -3.0% total return during February, underperforming the Russell 2000 Index’s +1.0% total return.

  • The energy secotr was the only S&P 500 sector to post a positive return for the second consecutive month. Communication Services was the worst-performing sector during February as Facebook declined more than -30%, and Technology was the second-worst performing sector as rising yields continue to hurt Growth stocks.

  • Corporate investment grade bonds generated a -2.1% total return, underperforming high yield bonds’ -0.9% total return.

  • The MSCI EAFE Index of global developed market stocks returned -3.4% during February, outperforming the MSCI Emerging Market Index’s -4.3% return.

Global Stock Markets Decline as Geopolitical Tensions Rise in Europe

The stock market’s bumpy ride continued during February. Last month’s top news story was rising geopolitical tensions and Russia’s invasion of Ukraine. The headlines briefly pushed the S&P 500 into correction territory, defined as a -10% or greater price decline, before U.S. stocks recovered a portion of their losses.

US Sector Returns (February 2022 in %)

International equities also traded lower as investor risk appetites declined due to rising geopolitical risk. In the commodity market, energy prices increased amid fears that geopolitical tensions would disrupt oil output and worsen an already under-supplied oil market.

Back in the U.S., markets prepared for the Federal Reserve to raise interest rates. The headline Consumer Price Index, which measures inflation, rose +7.5% year-over-year during January 2022. It increased from December 2021’s +7.1% and is the fastest annual increase since 1982.

Treasury yields increased for a consecutive month, indicating that investors expect the Federal Reserve to aggressively raise interest rates to ease inflation pressures. Rising yields led to a second straight month of negative credit returns and Growth stocks underperforming Value stocks.

Upcoming Federal Reserve Meeting Will Chart Course for Rest of 2022

The Federal Reserve will hold its March 2022 meeting on March 15th-16th. It is widely anticipated the Federal Reserve will raise interest rates by one of two amounts ― either +0.25% or +0.50%. Although the 0.25% difference between the two options may seem insignificant, we believe the decision will chart the course for the remainder of 2022.

If the Federal Reserve only raises the interest rate by +0.25%, investors may interpret the smaller increase as a sign the Federal Reserve will keep interest rates lower for longer, inferring economic growth will be less impacted. If the Federal Reserve raises the interest rate by +0.50%, investors may view the faster pace of interest rate increases as more likely to slow economic growth and potentially trigger a recession.

The takeaway is investors will be watching the Federal Reserve’s next move very closely as it will set the course for the remainder of 2022.

Our Insights

Featured
Election Driven Rally Pushes US Equities Higher
Election Driven Rally Pushes US Equities Higher

Stocks traded higher this week, with most of the gains occurring after the election. The S&P 500 reached a new all-time high, nearing the key 6,000 level. The broader equity market rally was notable as investors priced in the Trump administration’s pro-growth, reflationary policies. The past few weeks have been packed with market-moving events, but the calendar is expected to settle down as we approach year-end.

Treasury Yields Rise Following the Fed’s September Rate Cut
Treasury Yields Rise Following the Fed’s September Rate Cut

Stocks finished October lower as investors navigated Q3 earnings, the upcoming election, and uncertain Federal Reserve policy. Treasury yields climbed as investors considered the possibility that the Fed may not cut interest rates as much as previously expected. Concerns about fiscal spending also drove Treasury yields higher, with expectations for continued high government spending regardless of the election outcome.

The Next Two Weeks are Filled With Market-Moving Events
The Next Two Weeks are Filled With Market-Moving Events

This week, stocks traded lower after several weeks of consistent gains. The S&P 500 dropped -0.5%, underperforming the Nasdaq 100's +0.3% gain but outperforming the Russell 2000's -2.8% return. The Magnificent 7 rose over +2%, making Growth the only factor to trade higher. The next two weeks are filled with market-moving events, and once they pass, stocks could rally into year-end.

Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

I am currently the Managing Partner for our independent investment advisory firm, Optima Capital Management. Together with my business partners, Todd Bendell CFP® and Clinton Steinhoff, we founded Optima Capital in 2019 as a forward-thinking wealth management firm that serves as an investment fiduciary and family office for high-net-worth individuals and families. In addition to being the Chief Compliance Officer, my role at Optima Capital is portfolio management. I have over 18 years of experience in managing investment strategies and portfolios. I specialize in using fundamental and technical analysis to build custom portfolios that utilize individual equities, bonds, and exchange-traded funds (ETFs). I began my financial services career with Merrill Lynch in 2003. At Merrill, I served in the leadership roles of Market Sales Manager and Senior Resident Director for the Scottsdale West Valley Market in Arizona. On Wall Street Magazine recognized me as one of the Top 100 Branch Managers in 2017. I am originally from Saginaw, Michigan, and a marketing graduate from the W.P. Carey School of Business at Arizona State University. I am a Certified Private Wealth Advisor® professional. The CPWA® certification program is an advanced credential created specifically for wealth managers who work with high net worth clients, focusing on the life cycle of wealth: accumulation, preservation, and distribution. In addition, I hold the following designations - Chartered Retirement Planning Counselor (CRPC®), Certified Divorce Financial Analyst (CDFA®), Certified Plan Fiduciary Advisor (CPFA), and Retirement Management Advisor (RMA®). In the community, I am a member of the Central Arizona Estate Planning Council (CAEPC) and serve as an alumni advisor and mentor to student organizations at Arizona State University. My interests include traveling, outdoors, fitness, leadership, entrepreneurship, minimalism, and computer science.

Previous

How the Federal Reserve Impacts Your Portfolio and Borrowing Costs
Next

How Geopolitical Events Impact Your Portfolio