Market Monitor: March Update
Headlines and Highlights
- Fed launches ambitious rate-hike cycle: The Federal Reserve lifted its benchmark interest rate off zero for the first time since 2018 amid expectations the rate could exceed 2% by year-end as the Fed fights high inflation. The Fed’s preferred inflation gauge, the core PCE Index, rose 5.4% in February from a year earlier – the biggest jump since 1983 – even before intensified price pressures from the Russia-Ukraine war took effect.
- Labor market recovers as pandemic fades: S. employers added another 431,000 jobs in March, reducing the unemployment rate to the lowest since the start of the pandemic at 3.6%. The labor force participation rate ticked up to a two-year high of 62.4% – 82.5% for the prime working age category of 25 to 54 – and the economy has now recovered more than 90% of the 22 million jobs initially lost to lockdowns in the spring of 2020. The progress in the labor market reflects an increasing return to the workplace due to lessening COVID-19 concerns and higher wages, up 5.6% from a year ago.
- Poor quarter for stocks ends on the rise: Despite a March rally, stocks and bonds endured a rare down quarter for both on worries about inflation, rates and war. The S&P 500 Index vaulted higher over the past three weeks to reduce its year-to-date decline to 4.6% after having tumbled more than 12%. International stocks were up only fractionally last month but rebounded 10% from their low point in early March. Bonds extended their worst-ever start to a year amid fears the surge in inflation will prompt the Fed to be more aggressive in raising interest rates.
Selected Market Returns
- The March jobs report provided further evidence of a strong economy and improving labor market, giving the Federal Reserve more latitude to tighten without major risk of causing an immediate economic shock. We expect the Fed to raise interest rates by an additional half percentage point at their upcoming meeting in May given the strength of the economy and elevated inflation, which the market already anticipates.
- The outlook for inflation has worsened since the start of the year and we expect it to remain elevated for longer than previously expected. The Russia-Ukraine war has exacerbated supply-chain disruptions and created shortages of some commodities, ensuring that consumer price growth will remain high throughout 2022. We anticipate inflation climbing further this spring as the ripple effects of the war are felt more widely before beginning to slowly moderate later in the year.
- A closely watched part of the bond yield curve inverted briefly last week and again this week when the 10-year Treasury yield fell below that of the two-year Treasury, as the bond market anticipates the Fed pushing short-term rates higher. An inverted yield curve can be a harbinger of economic trouble. While every recession is preceded by a yield curve inversion, not all inversions lead to recessions. And, most importantly, a recession often does not follow for one to two years – if at all. Other important indicators are healthy and we do not believe a near-term recession is likely.
- Corporations and consumers both are in solid shape and we remain constructive on stocks over the remainder of the year. Market volatility will remain high this year, however, amid ongoing uncertainty about both the war in Ukraine and the course of higher inflation.
- Bonds had a historically bad quarter as interest rates rose and prices fell. Although bonds’ near-term pricing is uncertain, their ultimate path is positive, absent the unlikelihood of defaults. We believe their performance will normalize and we recommend keeping an allocation to bonds as ballast in portfolios given the economic and market uncertainty.
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.