February 2022 in Review
Daniel Zeigler, CFP, CMFC, Portfolio Manager
Hi everyone, this is Dan Zeigler, Portfolio Manager at Midland Wealth Management. Today I just wanted to provide a quick recap for the markets for the month of February.
After experiencing a brief 10% correction in most indexes in January, markets are back at it and are now retesting some of the lows we saw in January, albeit for some slightly different reasons, namely the Russia-Ukraine conflict.
For the month of February, the S&P 500 was down close to 3%, followed by international equities which were also down by about 3% for the month. The best performing asset class has been both mid-cap and small-cap domestic stocks, which are only slightly down for the month. Mid-cap and small-cap stocks tend to have less international exposure which may explain why they have not been hit as hard due to the ongoing conflict in Russia-Ukraine. The S&P 500 is down close to 8% for the year.
The market reaction to the Ukraine conflict reflects a fear of the unknown about how far the conflict will go, how severe sanctions will ultimately be, and uncertainty about how severe the economic impact will be with the main threat being higher energy prices. Europe relies heavily on Russia’s natural gas imports, which account for about 30%. Investors are worried about a stagflationary shock to Europe with slowing economic growth and rising inflation.
If the conflict is limited to Ukraine, NATO troops stay out, and Russian gas is not cut off, the conflict is unlikely to cause significant damage to global growth. The main threat will likely be a hit to confidence and higher energy prices adding to already higher inflationary pressures. European exports to Russia are just 0.7% of its GDP and US exports to Russia and Ukraine are less than 0.2% of its GDP. The Ukraine crisis is unlikely to stop the central bank from increasing interest rates, however it may lead to a slower increase in rates. The likelihood of a 50 basis points interest rate hike in March has declined and now the market is predicting the interest rates will hike by about 0.25%.
No one really knows for sure how this will unfold, but historically these events follow a similar pattern. An initial sharp fall, followed by a rebound. The average decline for similar military interventions has been about 6%, however one year later, the market has been up 13% on average. Investing in a diversified, goals-aligned portfolio has paid off through countless geopolitical crises and should continue to do the same. Investors should continue to stick to an appropriate diversified long-term investment strategy as we ride out this volatility. Markets will continue to be sensitive to sanctions and Russia’s counterresponse to them. Should this correction get significantly deeper, we will be looking for the opportunity to add to equity at a much lower price. Currently we feel caution is warranted until we see how things develop with Russia and Ukraine. Please feel free to reach out to myself or one of our portfolio managers if you would like to review your portfolio in greater detail during this uncertainty.