· February markets started off the month with a bit of a bounce back from the hard hit we took during January, but January’s many concerns remained. And volatility persisted. The most defining moment came at the end of the month as Russia invaded Ukraine. U.S. markets in general took a large hit, with the S&P 500 down over 3% for the month and at roughly -8% for the year.
· Growth equities continued to see the worst of it, while Value has fared relatively better, assisted by surging energy and commodities related companies. International Markets also took a hit, with the EAFE down roughly 1.8% and Emerging markets suffering worse around -3% for the month.
· US bonds prices continued to fall during the month and with the aggregate down ~4% YTD. While treasuries and other high-quality debt has historically been safe place during such global turmoil, the Feds actions to hike rates has keep some downward pressure and the yield curve flat. Both the 5-year & 10-year treasury yields remained just below 2%. Emerging Market debt, largely driven by Russia, plummeted, down nearly 12% as of the end of the month.
· The world response to the aggressive and deadly actions of Putin to invade Ukraine sparked significant sanctions against Russia. The anticipation going forward is that if sanctions on Russia continue for extended periods, not only will Russia’s economy continue to spiral downward (along with the Ruble), but much of Europe feel some negative impact as well.
What we Did:
· Proxy continued to keep focus on the longer term, especially since such geological events tend to have short lived impacts on financial markets. In this case, the current pressures on global supply chains will likely continue to grow the many sanctions and their impact, which can add more pressure to the highest inflation seen in 40 years. We did reduce some of our direct Emerging Market exposure in our Global Equity models. Even prior to Russia’s invasion of the Ukraine, we did not have a very positive outlook on Emerging Market.
· Growth continued to be out of favor by the Market, as much of it is characterized by higher risk and promises of future earnings. When the present is nebulous, Wall Street has even less appetite to bet on the future. The Proxy Growth portfolio stuck to its discipline because short term volatility historically is compensated by long term focus. Our diversification into small and midcap growth which had been a detractor prior, seems had found some support and added positive returns. The recently downtrodden Large Cap. companies are now down approximately 12% on year.
· Proxy also stayed the course within the value oriented, Dividend Income portfolio. We benefited from adjustments made at the end of 2021, as we leaned into energy and
precious metals adding companies such as Newmont Corp and TC Energy Corp. These additions not only added to the outperformance of the S&P in 2022, but also boosted the 12-month yield to 3.7%.
· Regarding fixed income, higher quality and lower duration have helped our performance in this difficult period for bonds. Rising rates will affect most any fixed income position, whether through mark-to-market volatility or decreasing face values. We made no changes and will continued to stay away from low credited quality and Emerging Markets.
What we are Watching:
· Like every person in the free world we keenly observing the war which Putin has brought on the people of Ukraine. Our hearts go out to the people of and in Ukraine. While there is no point in attempting to make sense of the actions of a mad man, we are focused on the spillover effect of the growing number of sanctions against Russia. So far, we don’t see a dire scenario that would warrant adjustment of financial plans and goals. Stay the course of your plan for now. As with anything in life, if matters escalate we will let our clients know.
· Supply chain issues, record level inflation, Fed rate hikes and the end of its asset purchasing in March are also top of mind as we watch market volatility continue in this still young 2022.
· Aspects of all this uncertainty may give the Fed some pause when it comes to how hawkish they might be with the initial rate hikes and maybe even the total number of increases. A more dovish approach should benefit the market.
Overall, the US economy was healthy prior to Putin’s invasion. If spiked energy prices, increased supply chain issues and a hawkish Fed do all culminate into a recessionary environment, it will possibly be short and shallow. We are not overly concerned about a slowing economy because of the healthy employment market.