Market Monitor: March Mid-Month Update
Headlines and Highlights
- Fed poised for rate liftoff: The Federal Reserve is widely expected to raise the federal funds rate by 0.25 percentage point at its two-day meeting ending Wednesday, kicking off a rate-hike cycle aimed at cooling down inflation. The Fed’s task has been complicated by the Ukraine war’s strain on global energy markets. Consumer prices rose at a 40-year high annual pace of 7.9% in February, although spending so far has remained strong.
- IMF sees lower growth rate but no recession: The International Monetary Fund will downgrade its global economic projections for 2022 but still foresees a positive growth rate despite the war in Ukraine. IMF Managing Director Kristalina Georgieva said the war and associated Western sanctions are unlikely to trigger a global financial crisis.
- Markets extend downturn: Stock and bond markets both declined further in the first two weeks of March under pressure from the war, inflation and imminent interest-rate increases. The S&P 500 Index shed another 4.5%, leaving it down 12.2% for the year to date, while the Vanguard Total Bond benchmark for taxable fixed income declined 2.6% and for a 2022 return of negative 5.8%. The lone asset class to show gains this month has been U.S. and global real estate, where the benchmarks posted modest gains but remain down for the year.
Chart of Interest
First of a series. Market expectations based on futures trading is for the Fed to raise its baseline interest rate, currently zero to 0.25%, six or seven times in 2022 to 1.75%-2% by year-end.
Sources: CME Group, Altair Advisers
Key Takeaways
- The Federal Reserve will raise interest rates at a steady but presumably moderate pace beginning Wednesday with the first of several increases to the federal funds rate. Uncertainty concerning the war in Ukraine will make Fed officials more cautious in their approach.
- Economic growth will continue despite the war. The U.S. economy has slowed to an estimated 0.5% annual pace in the first quarter, according to the Atlanta Fed, and is likely to remain below trend as a result of higher interest rates and rising commodity prices. However, the labor market remains strong, job openings are at a record high and the economy remains on solid ground.
- Strong company fundamentals should help the economy weather elevated inflation even as the war in Ukraine continues. S&P 500 earnings estimates have continued to rise despite new challenges in 2022, in part reflecting that higher inflation levels can add to profit growth in the near to intermediate term and that so far consumers have continued to spend.
- Market volatility is likely to persist for the near term amid uncertainty about the impact of rate increases on both growth and inflation. Ultimately, historical precedent suggests that downturns from both geopolitical turmoil and rising rates are comparatively short-lived and can end abruptly with significant snapbacks.
- Despite stocks’ poor start to 2022, we expect a recovery to be swift when it occurs and will look for opportunities to increase allocations if the downturn intensifies. Stocks tend to do well after corrections (declines of 10% or more), such as the 13% drop in the S&P 500 since the January 3rd all-time high. This is the 33rd correction or bear market since 1950, according to LPL Research, and the S&P 500 rose nearly 90% of the time a year or two later, with very strong returns.
The material shown is for informational purposes only. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and actual results may differ materially from those anticipated in forward-looking statements. As a practical matter, no entity is able to accurately and consistently predict future market activities, and all investments are subject to the risk of loss. While efforts are made to ensure information contained herein is accurate, Altair Advisers LLC cannot guarantee the accuracy of all such information presented. Material contained in this publication should not be construed as accounting, legal, or tax advice