The first quarter of 2022 has been quite volatile for markets. Concerns about the Russian invasion of Ukraine and the need for faster interest rate hikes to combat inflation weighed heavily on both equities and bonds. The first half of March looked rough as the S&P lost over 4% before ripping up to an overall gain of 3.8% for the month. As of the end of March, the stock markets have now recovered their losses since the Russia-Ukraine conflict began in February.
The end of March rally brought the S&P’s YTD loss to about 5% despite continuing concerns about inflation and hawkish monetary policy.
The narrative that inflation was transitory has definitely changed since the beginning of the year. The start of the war in Ukraine and the resulting commodity supply shock makes the decision of choosing growth or taming inflation for central banks an even more difficult one to make. Despite the uncertainties related to this conflict and its effect on economies, central banks have so far shown that inflation is the more pressing topic. With rising cost of energy, housing, goods, and food (fastest inflation rate in 40 years) the Fed raised interest rates by 0.25% this month for the first time since 2018, indicating a shift in policy’s stance from economic growth to controlling inflation. Fed members expect regular increases at most of the Fed meetings through the rest of this year. Other members have even stated that they support stronger rate increases.
In response, interest rates across the bond yield curve have shot up, with the 10-year Treasury notes jumping from 1.8% to 2.5% this month. The latest inflation reading came in at 7.9% suggesting yields could keep pushing higher if prices don’t show some downward pressure.
As yields rise, bonds and T-bill prices fall, thus this month’s sharp jump in rates has caused Treasuries to post their worst quarter since 1972. If inflation continues exceeding the Fed’s target of 2%, then bonds could remain under pressure longer as investors demand higher yields. With most longer-term bond yields sitting around 2.5%, well below the rate of inflation, real returns remain negative.
Regardless of the inflation situation, the US job market showed significant numbers this month with the release of the February jobs report coming in better than expected with nonfarm payrolls easily beating the consensus of forecasts. Unemployment dropped to 3.8% and the labor force participation rate moved up to 62.3% Wage growth was at 5.1% year-on-year.
This month, congress passed a spending bill to fund the federal government through September. This combined with last Decembers $2.5 trillion increase in the debt ceiling significantly lessens the risk of a looming financial crisis.
Overall, the outcome of the war in Ukraine remains uncertain. If tension escalate, we could see further pricing pressure on commodities and energy which would only serve to worsen the state of inflation and supply chain constraints that were already poorly managed through the pandemic.
However, geopolitical issues, as we have seen with the market’s bounce this month, have a harsh but quick impact on the markets. As we discussed in last month’s update, geopolitical events, on average, take 22 days for the market to bottom out and then 47 days to recover. This event took about a month. This is way its important to not panic-sell and not worry about the volatile ups and downs of the market in times like these.
It is important to have a constructive approach. One that emphasizes keeping a diversified portfolio of financially sound and strong companies that have long term potential. As a dividend investor, the best dividend paying stocks usually contain those traits. Holding dividend stocks of strong, established, tested, and successful companies makes it easy to buy when the price is down, earn more dividend income while the yields are high, and reap rewards of safe a steady income stream to support yourself with or use to grow your positions.
While it is impossible to predict what will happen in the coming months, I can confidently predict that the collection of businesses I hold in my portfolio will continue to deliver dependable dividends and make capital gains over the long term. Stay true to the strategy and I will check back with another update next month!
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