March offered U.S. stock market investors sweet relief following a forlorn January and February. The S&P 500 rose 3.6% in the month, offering a degree of recovery from a painful correction during the prior two months in which stocks had dropped as much as 13% from all-time highs.
For the first quarter of 2022, all major stock benchmarks saw their biggest quarterly losses in two years, ranging from a 4.6% decline for the S&P 500 to as much as 9% for the Nasdaq Composite.
Meanwhile, Russia’s invasion of Ukraine continued despite intermittent peace talks, threatening the European economy as well as American business investment and consumer spending.
It all adds up to a topsy–turvy investing environment, which may yet persist.
“Uncertainty is really what drives volatility,” said Charlie Ripley, vice president of portfolio management for Allianz Investment Management. “Until we can get some clarity, there will likely be continued volatility in the bond and stock markets.”
Inflation Remains the Biggest Hurdle
Americans are feeling the pinch of higher prices: 65% of adults believe the rate of inflation will go up in the next year, according to the latest Forbes Advisor-Ipsos Consumer Confidence Weekly Tracker.
That matters for market participants, since high levels of inflation can negatively impact both spending, which accounts for about two-thirds of gross domestic product (GDP), and consumer sentiment.
For instance, February retail sales came in below expectations thanks in large part to consumers dealing with higher prices, and the Fed lowered expectations for GDP growth this year at their March meeting“We’re cautioning investors to not discount ongoing inflation and rising prices even as the Fed starts to make these moves on interest rate hikes,” said Greg Bassuk, chief executive officer of AXS Investments.
While the Fed doesn’t convene again until May, some market participants are clamoring for bigger rate hikes, in the magnitude of 50 basis points, as opposed to the 25-basis point increase seen in March.
By year-end, traders see a greater than 66% probability that the fed funds rate will have a target range of 2.50% to 2.75%, which would be the highest since 200
Is the Bond Market Telling Us Something?
The bond market is flashing a signal of a possible recession as the 2-year and 10-year Treasury yields have inverted for the first time since 2019.
An inverted yield curve occurs when rates for shorter-term bonds are higher than those for longer-term maturities, and it can indicate possible trouble ahead, although analysts caution this is only one among many predictors of recession.
Before then, expect a lot of continued focus on two inflation reports, the consumer price index (CPI), scheduled for release on April 12, and the personal consumption expenditures (PCE) price index, scheduled for release on April 29.8.
The pace of economic growth had largely taken a backseat to other concerns in recent months, including geopolitical risks—namely, Russia’s invasion of Ukraine—and the declining number of Covid-19 infections.
These factors are among the main drivers of the stock market right now, according to Bassuk, and Corporate America’s stalled plans to bring employees back into offices en masse means the pandemic is not “in the rearview mirror just yet.”
But for the first time in a long time, Bassuk expects market participants to be “really laser-focused” on any reports that provide more clarity about the outlook for the economy.
There were murmurs among some investors about a possible recession even before the key yield curve inverted, particularly because continued high inflation could weigh on consumer spending.
How to Invest in May 2022
Both Bassuk and Ripley agree that investors should brace for more volatility in April. While wild price movements can create opportunities for people who trade frequently, particularly if there are big dips in stock prices, it can also heighten anxieties of even the most steadfast long-term investors.
Being selective about specific sectors or stocks is a theme that Bassuk is also conveying to his clients. In addition to the year-to-date slump in the stock market, the prospect of higher interest rates to come could provide a window to buy stocks at a discount.
And investors may want to think about positioning their portfolios in April to benefit from those dynamics ahead, he adds.