Financial Market Breakdown – Week of April 4, 2022


Quick Highlights

  • Futures are slightly higher following a generally quiet weekend of news.
  • Geopolitically, there are calls for more sanctions on Russia as the international community is now accusing Russia of war crimes following the discovery of a mass grave outside of Kyiv. Oil, which is the key proxy for additional sanctions, is only slightly higher, however.
  • Economic data was sparse as the only notable report was German exports which rose solidly (up 6.4%).

What’s Happening in the Financial Market?

Stocks rallied early last week on hopes for a ceasefire in Ukraine but the optimism faded by week’s end on deteriorating rhetoric from both sides. That saw the equity market give back the majority of the gains with traders also digesting fresh economic data. The S&P 500 edged up 0.06% on the week and is down just 4.62% YTD.
The March jobs report was rather strong and did not alter expectations for a 50-basis-point rate hike in May. Then, the March ISM Manufacturing Index notably missed estimates (57.1 vs. E: 59.0) and stocks fell to new lows for the week. Newswires were mostly quiet for the remainder of the session, which saw stocks bottom in the afternoon and bounce into the close as traders continued to rebalance portfolios at the start of the new quarter while eyeing the deepening inversion in the yield curve.
Staying Focused on What Really Causes Bear Markets
The S&P 500 finished the first quarter down 4% but all things considered, it could have been a lot worse, and the broad markets need to be respected for their continued resilience. Consider that over the past three months: 1) the Fed has massively increased the number of expected rate hikes from 100 bps of tightening in 2022 to 250 bps of tightening in 2022, 2) oil and other commodities have exploded to multi-year highs, adding to inflation and threatening to compress corporate margins, 3) the most heavily owed parts of the market (tech and growth) dropped sharply, and 4) there’s a major war going on in Europe and the whole flow of energy around the globe is about to be reshuffled. With all of that happening simultaneously, we must respect that the S&P 500 is only down 4%.
The resilience does set us up for short-term continued upside if 1) there’s a ceasefire in Russia–Ukraine, 2) the Fed announces that balance sheet reduction will be slower than expected, and 3) the Q1 earnings season is better than feared. While we still view 4,600 as a fundamental valuation “ceiling,” the bottom line is that it shouldn’t shock anyone if the S&P 500 moves through that level by a percent or two.
So, does this relatively impressive market resilience mean that we are too cautious? No, it does not. While the ingredients are there for a continuation of the March rally, it doesn’t diminish the long-term risks building for this market. Generally speaking, the Fed starting a rate hike cycle, a contained regional war, and inflation don’t cause sustained declines in stocks.
Those factors, over time, erode two things: economic growth and corporate earnings. And it’s the drop in those factors that causes sustained declines in the stock market. While we are headed toward both of those eventually, we are not there yet.

Bottom Line

The market was resilient given the barrage of negative headlines in Q1. But don’t view the market’s resilience as infallibility. If the factors that caused volatility persist for the coming quarters, eventually they will kill growth and hurt earnings. That’s when it will be time to get materially defensive—and we are singularly focused on identifying that time. Until then, we continue to view this market as a hold, with tactical allocations focused on value, dividends, lower volatility, and inflation/high-rate exposure.

Near-Term General U.S. Stock Market Outlook

Near-Term (1 month) Stock Market Outlook: Neutral
Stocks logged a small positive return last week thanks to reports of some progress on a Russia–Ukraine ceasefire, while corporate commentary and earnings were better than feared.

By The Numbers



Bane O'Leary