While the list of concerns facing the economy and the markets remains long (Russia’s invasion of Ukraine, high oil prices, surging food prices, rising inflation, Fed rate hikes, supply-chain issues, etc.) the March jobs report provided a bright spot. Nonfarm payrolls rose by 431,000 and the prior two months were revised upwards by 95,000 jobs. The headline unemployment rate dropped to 3.6% from 3.8%, approaching the pre-pandemic low of 3.5%. The participation rate (the proportion of the working age population that is either working or actively seeking a job) ticked up to 62.4%, still below the 63.4% pre-pandemic participation rate, but the highest so far in the recovery. The median duration of unemployment is 7.5 weeks, lower than it was pre-pandemic, which means people who lose their jobs are not staying unemployed for long. Average hourly earnings are rising, but not enough to keep pace with inflation. Total payrolls are still 1.6 million shy of where they were before covid, but that number should recede in the coming months if we continue to see robust job growth.
Source: U.S. Bureau of Labor Statistics; Federal Reserve Bank of St. Louis
The Stock Market
In like a lion out like a lamb usually refers to the weather patterns in the month of March but would also ring true in relation to the stock market this year. As the month began all eyes were focused on the tragedy unfolding in Ukraine as well as what the Fed would do at their regularly scheduled meeting. Between the end of February and mid-March the S&P 500 was down 4.6% and the Nasdaq fell by 8.5%. From there the market moved rapidly upward. Over the following two weeks the S&P 500 rallied nearly 11%. Despite declining on the final two trading days of March the S&P posted a total return of 3.7% for the month. Ten of the 11 major sectors that comprise the market were up, led by Utilities with a rise of 10.3%. Financials were the only sector to finish in negative territory with a total return of -0.19%. The tech-heavy Nasdaq composite staged an even more impressive rally during the last two weeks. Between the index’s recent near-term bottom on March 14th and the close on March 29th, the Nasdaq was up nearly 17%.
Stocks posted their first quarterly decline in two years with the S&P 500 falling nearly 5%. The decline in asset prices so far this year has been widespread. Notable exceptions are Oil, the Energy and Utilities sectors and gold, which were all up in the first quarter. Value stocks performed well on a relative basis with the Russell 1000 Value index posting a modest decline for the quarter. Growth stocks, Technology, Discretionary, and Communications sectors, which were some of the best performing areas since the bottom of the market in March of 2020 were among the worst performers so far in 2022.
Source: Goldman Sachs US Quarterly Chartbook
The bond market had its worst quarterly return in nearly 40 years. The Bloomberg U.S. Aggregate bond index, which tracks the performance of the broad fixed income markets in the United States, posted a total return of minus 6%. Bonds are currently facing headwinds from high inflation and rising interest rates. The Federal reserve increased the benchmark short-term interest rate by one quarter of one percent at their March meeting and have hinted at more aggressive rate increases in the coming months. The biggest challenge facing the Fed will be fighting inflation without driving the economy into recession, a sentiment that is reflected in the current shape of the Treasury yield curve. As of the end of the quarter the rate on the 3-year treasury note was higher than the rate on the 10-year note. Investors typically demand higher interest rates in exchange for lending money out for a longer period of time. When shorter rates are higher than longer rates it can mean that investors are concerned about a coming economic slowdown that would place downward pressure on rates in the future.
Source: Bloomberg L.P.
Investing in times of uncertainty often produces results that vary from what might be expected. As we entered the month of March and markets were on edge the kneejerk reaction may have been to de-risk investor portfolios by moving out of stocks and into bonds. However, since the day prior to Russia’s invasion of Ukraine the S&P 500 is up over 7% while the broad bond market is down nearly 2%. This demonstrates the need for discipline and consistency in executing an investment plan that is consistent with one’s overall goals and objectives. Understanding that investing will always involve unknown risks over the short-term will help avoid the temptation to make significant changes in response that could impede long-term results.
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