A different month, a different worry. While we had been expecting a choppy month of market action in February, we expected this action to be driven by speculation about future Fed action instead of the invasion of Ukraine. Outside of a comment by voting Fed member James Bullard on February 10th, most of the market anxiety for February surrounded the building of tension and then the eventual invasion of Ukraine by Russia.
As we explained in our investor note last week, the market is often more concerned about the "build-up" to an event and typically rallies once the conflict begins. Said another way, when you hear the alarms, a stock market bottom may be afoot.
That is what we got last Thursday on the 24th when the market rallied out of a massive pre-market drop caused by Russia beginning its invasion into Ukraine. The action of last Thursday was somewhat historic as both the S&P and Nasdaq put in huge reversal days. The reversal in the S&P was the 19th largest intraday reversal we have seen since 1994, while the turnaround in the Nasdaq was the 5th largest over the same time frame. This strong rebound leads us to believe that the overall market put in its initial 'external low,' which will become an area of significant support moving forward.
Also, we cannot overlook that the Russell 2,000 Index posted a positive return for the month. Given its composition toward smaller capitalized equities, the Russell tends to be more economically sensitive. So, posting a positive return for a month full of volatility, we should expect the overall market to follow eventually.
February Best Sectors
February Worst Sectors
March Historical Data Points
March is traditionally a strong month for all market indices during midterm election years, with the Russell 2000 and Nasdaq expected to lead the way.
The month is usually noted with early and mid-month strength followed by weakness into the end of the month as the 1st quarter closes out and the tax date nears.
March 2016 was only the third month on record in which the DOW gained more than 1,000 points.
Maybe just a coincidence, but January & February's market weakness in 2016 was very similar to what we saw in 2022.
Gains on St. Patrick’s Day have been greater than the day before and the day after.
The Fed... Finally
It seems like an eternity since the great debate over how many rate hikes the Fed will undertake in 2022 began. The release of the Fed minutes on January 5th supercharged this discussion, but it seems like a lifetime ago based on the market volatility so far this year. On March 16th, the Fed will finally answer how much they will raise rates by, will it be 25bps or a more aggressive 50bps? Will they paint a more hawkish picture for future rate hikes for 2022 and beyond?
There are two things that we know will be the case come the Fed’s announcement in two weeks:
The Fed will have completed the tapering of the bond-buying program. While the market continues to adjust to the removal of liquidity provided by the Fed’s program, it should be viewed as a positive that the economy is moving on from excessive stimulus.
The economy has been slowing back to pre-Covid trends, and it will likely take several months for this data to stabilize. While inflation is a concern and will be a massive political topic leading into election season, history has shown that an aggressive Fed in front of a slowing economy leads to many more problems. The Fed will have to decide how to handle this.
We feel that the Fed will remain overly cautious, even in the face of inflation and inflation-induced political pressures. While the Fed hinted that it will likely raise rates by 25bps in March, we also expect the comments about future rate increase to remain very conservative.
March Market Outlook
“I was reading in the paper today that Congress wants to replace the dollar bill with a coin. They’ve already done it. It’s called a nickel.” ― Jay Leno
As we previously warned, a midterm election year market tends to be volatile leading into November, which is the most bullish season of the Presidential cycle. There are always various events that appear ahead of elections that cause market volatility. While many would have expected the Fed to affect the markets this year, the Ukraine crisis is the perfect example of issues that pop up during midterm years that can throw the market off track. The chart below shows how the seasonality of the midterm market
March usually has been a solid performing market month. During midterm election years, March becomes one of the best performing months for the year and has been up in five of the last six election cycles. In the case of both a first-term president and then, more specifically, a Democratic president, March usually represents a reversal of previous market weakness and the start of an excellent rebound over the next two months. The market so far for 2022 has been a bit more complex than customarily expected; in periods like this where the market gets a bit off track, it usually ends up working harder to get back on track.
We remain optimistic for March, but must be realistic and understand that achieving a positive outcome will involve a fair amount of investor patience and emotional control. The Ukraine conflict may assist the US market since this may cause the Fed to maintain an easy monetary policy for longer. A less hawkish Fed would be a significant positive market catalyst for technology stocks which typically lead the broad market indexes. Also, a Fed that can delay aggressive policy changes until the second half of 2022, when we expect inflation to decline somewhat, may allow them to move slower if inflation no longer appears out of control.
In conclusion, we still expect trading to be choppy and inconsistent for the month. Outside of a major intensification in the Ukraine conflict, the next Fed meeting in two weeks should offer a nice relief rally for the market and likely make March the first positive performance month in 2022.