Even though it was a wild ride, March turned out to be the first positive month in 2022 for the major indexes. In the first two weeks of March the S & P 500 re-tested the low set in January before gaining its footing and moving higher on March 15. It was March 15th and 16th that the Federal Reserve Board met and voted to raise the short-term interest rate 0.25%. The index bounced on the news and continued up for 4 consecutive trading days. The S&P 500 closed the month a full 10% higher than the lowest point this year set on February 24th the day Russia invaded Ukraine.
At the close on March 31st, the S&P 500 and the Dow are still down nearly -5% year to date. The Nasdaq is off -10% year to date. Inflation continues to be a problem and momentum is on the side of continuing higher prices. It usually takes some time to turn this around. March brought the first interest rate increase in 3 years and the Federal Reserve chairman stated that we could expect more increases this year. The invasion of Ukraine has lasted longer than anyone expected and geopolitical pressures continue to worry investors. There is much work to do in 2022, but the market action in the last half of March is very encouraging.
We posed the question in a recent market message, “Could the market be working on a bottom?” The gains in the last dozen trading days are shaping up to look like a market bottom. But, we still face serious economic challenges and geopolitical crises which could turn the market around fast. While we are encouraged, we remain committed to our risk management strategy.
News this week of the “inverted yield curve” has frightened some investors into believing a recession is imminent and that could turn this market down. Last week the yield on the 2-Year Treasury rose to 2.337% briefly and the yield on the 10-Year Treasury fell to 2.331%. Typically the longer bond pays a higher yield. This is referred to as an inverted yield curve.
This does not happen often. According to The Chartist in its March 31, 2022 monthly report (www.thechartist.com), history records it has happened about 28 times in 120 years. The significance is that about 75% of the time a recession follows the inversion. It is important to note that there is usually considerable lead time between the inverted yield curve and a recession. Again, from The Chartist, since 1978 on average it takes about 22 months after the short term bond pays a higher yield than the longer term bond before a recession takes place. And, what about the market? The S&P 500 on average is up 12% one year after a 2 - 10 inversion.
Remember, this is history which does not predict the future and we can’t rely on averages. There is no guarantee that the recent inversion will lead to a recession. There is also no guarantee the S&P 500 will be up 12% following the recent inversion. Headlines like this make news and we want our readers to be informed. In our opinion it is important to consider the full picture of the market and not make a sudden change in investment strategy based on a single event.
We see strength in the market with more stocks reaching new highs than new lows. The gains in March are encouraging. If you have questions about your account, please contact us. We will be glad to discuss it with you.
Written by Connie C. Guelich, CFP, AEP, CLU, ChFC. This represents our views at the time of this writing, and it is subject to change. It is not intended to be personal investment advice. If you would like to discuss your own account, please don’t hesitate to call us.