INSIGHTS

On April 06, 2022

Markets Bottomed in the 1st Quarter When Oil Peaked

The first quarter of 2022 finished with the S&P 500 down 4.9%, the tech-heavy Nasdaq down 9.1% and the Dow Industrials down 4.6%. Oil prices peaked on March 8 at $128 per barrel (Brent crude oil) and the market bottomed around that same time, clawing back about half of the loss incurred for the quarter. Most of the damage to technology stocks actually happened well prior to the war in Ukraine, as these typically higher valuation growth stocks already adjusted to a probability of higher interest rates and inflation. Prudent positioning going into the current interest rate cycle was to be overweight banks, which could benefit from higher interest rates and better economic activity. Adding select industrial or “value” exposure was also the strategists’ favorite given improving macro conditions as we exit the global pandemic.

That market playbook was flipped on its head with the uncertainties of the war in Ukraine which began on February 24, making it one of the more complex investment environments we have seen. Bank stocks which outperformed until February 24, reversed course and began to underperform dramatically from the day of the invasion. Financial stocks looked beyond the still highly favorable macro-economic environment, pricing in various recession scenarios, which were non-existent prior to Russia’s invasion of Ukraine. The conflict further stoked the already skyrocketing inflation with oil and wheat prices spiking. Important technology components and semiconductors, including access to batteries, were disrupted and impacted production of next generation electric vehicles and traditional internal combustion engine vehicles in an already tightly supplied auto market.

The first quarter was disappointing for most active managers, given that every sector other than energy and utilities was down for the quarter. The strength in the March employment data, as well as the upward revision to the February data, points to a solid footing for the U.S. economy. The unemployment rate continues to be on a downward trajectory, now at just 3.6%. The main uncertainty in the near term remains the duration of Russia’s war on Ukraine and the humanitarian crisis unfolding there. It is impressive to see how united the West has become as a result of the invasion, which is impacting everything from energy to immigration policies. European economies are bearing the brunt of the oil and gas shock; we believe a recession there is likely. This is already playing out in the relative weakness of the euro, as seen in the chart below. In the U.S., a recession remains the lower probability scenario despite the now inverted yield curve for maturities from two years to 30 years, as seen in the second chart below.

Source: FactSet

CRN: 2022-0401-9906 R

The opinions and views of this commentary are that of C.J. Lawrence, LLC and are not necessarily that of Advisors Asset Management. 

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