US stock markets experienced a remarkable March rebound with spikes of volatility in the face of a European war and surging inflation. Bond markets reacted to the first interest rate hike in four years with rising Treasury yields (lower prices) and flashes of recessionary signals. Despite the March rebound in the US stock markets, the US stock and bond markets ended up with a quarter of losses.

Russia continues its aggression, though they’ve failed to achieve any of their initial objectives, according to Western military experts. The conflict actually looks like it’s reaching a stalemate, fueling uncertainty for both Ukrainian and Russian lives.

Rate Hikes Begin

Last month, we discussed the Federal Reserve’s tightrope act of managing interest rate hikes while the Russia-Ukraine war continues to cause surges in food and energy prices. If the Fed hikes rates too aggressively, they risk a hard landing of the economy. Hike too slowly and inflation could get out of hand, especially with (hopefully temporary) war-related price shocks.

The Fed decided to start the rate hike cycle gently, with a 0.25% hike, calling the Russian invasion a “game-changer” that could have unpredictable consequences. Stock markets seemed to react jubilantly to the move, starting a rebound that ended the month in positive territory.

Russia is home to roughly $75 trillion worth of natural resources, and as a result of the conflict, several metals have touched multi-year highs, including copper, aluminum, and palladium. For example, Russia is the world’s leading exporter of palladium, a critical metal for automotive exhaust systems and mobile phones.

China lockdown

Another contributor to inflationary pressures came in the form of a re-emergence of COVID-19 in China. Despite the nation’s “zero Covid” policy, cases have been on a tear, with few signs of slowing.

In response, China locked down Shenzhen, a province of 24 million, which is also a major tech hub and the heart of electronics manufacturing in China. Significant manufacturers such as Foxconn, one of Apple’s largest iPhone manufacturers, and BYD, one of China’s largest electric vehicle and battery cell manufacturers, have had to shut down as a result.

The Shenzhen province is also home to the Yantian port, which is the fourth largest globally and processes 90% of China’s electronics shipments. Unfortunately, the global shipping backlog could still worsen before it gets better.

Shanghai was also recently placed in a phased lockdown, which forced Tesla to suspend production.

In other words, further supply chain delays and price inflation of semiconductor chips, computers, phones, and cars could put additional pressure on aggregate inflation numbers.

Yield curve inversion prompts recession talk

At the end of the month, the Treasury yield curve inverted for the first time since 2019, meaning the 2-year Treasury yield exceeded the 10-year Treasury yield. Yield curves plot the interest rates of bonds across different maturities. Long-term bond interest rates are generally higher than short-term ones.

However, when investors demand the safety of longer-dated bonds, their prices rise, causing their interest rates to fall. When those rates fall hard enough (i.e., when the demand for long-term bonds is high enough), they can fall below short-term interest rates. This is an “inversion”.

This difference in interest rates is a frequently considered a forward indicator of recessions. In fact, every recession in the past half century has been preceded by a yield curve inversion. In a chicken-and-egg situation, a yield curve inversion could ironically also contribute to a recession, as banks might disburse fewer loans—they’re less profitable when short-term rates are higher.

However, it is important to note that not all yield curve inversions are followed by a recession. As such, the re-emergence of this signal has prompted some debate about what comes next. For example, one significant bond manager, PIMCO, has argued that yield curve inversion may not be a reliable indicator anymore, given the enormous amount of quantitative easing globally.

Resilience of US households

With all that’s going on, it might come as a surprise that U.S. consumers are showing a high degree of strength.

According to a Federal Reserve report, surging stock prices and higher home values have pushed US household net worth to a new record of $150 trillion in Q4 2021.

Granted, only a little over half of Americas own stocks, and not everyone owns a home (65.5% do). When prices rise, it’s generally lower income groups that suffer disproportionately.

However, the JPMorgan Chase Institute found that even for the lower-income segment, median checking-account balances at the end of 2021 were well above 2019 levels.

In general, consumer savings have remained elevated, with net private savings growing at an annualized pace of $2.4 trillion in the fourth quarter. Not only are savings levels high, but unemployment remains at a historic low of 3.8%. In March, employers added 455,000 jobs, following the 475,000 increase in February, according to ADP.

The Bottom Line

Stock markets displayed a valiant recovery towards the end of March in spite of rising inflation, prolonged geopolitical uncertainties, and tightening monetary policy. Despite all the news, we’re still in the midst of a strong economic cycle—but there remains a lot of room for volatility and uncertainty.

This communication is distributed for informational and educational purposes only and is not an offer to sell or a solicitation of an offer to buy any security. The information herein has been derived from sources believed to be accurate, but no guarantee can be made as to its accuracy or completeness. All investments include the risk of loss and nothing herein should be construed as a guarantee of any specific outcome or profit. Past performance is no guarantee of future results. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly.

All economic and performance data is historical and not indicative of future results. All opinions expressed herein are those of WealthSource® Partners, LLC and do not necessarily represent the opinions or views of WealthSource’s affiliates, are current only as of the date of this communication and are subject to change without notice. WealthSource does not have any obligation to provide revised opinions in the event of changed circumstances.

The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The Nasdaq Composite is a market-capitalization- weighted index consisting of all Nasdaq Stock Exchange listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds or debenture securities. The Bloomberg Barclays U.S. Aggregate Bond Index measures the investment-grade U.S. dollar-denominated, fixed-rate taxable bond market and includes Treasury securities, government-related securities, corporate securities, residential and commercial mortgage-backed securities, and asset-backed securities.

The S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally considered representative of the broad U.S. stock market. The MSCI All Country World Index (ACWI) is designed to represent the performance of large- and mid-cap stocks across 23 developed and 26 emerging markets and represents approximately 85% of the free float-adjusted market capitalization of each market. The MSCI Europe Index captures large- and mid-cap representation across 15 developed market countries in Europe and covers approximately 85% of the free float-adjusted market capitalization across the European developed market equity universe. The MSCI Emerging Markets Index captures large- and mid-cap representation across 26 emerging market countries and covers approximately 85% of the free float-adjusted market capitalization in each country.

Chris Shea

Chief Investment Officer

As Chief Investment Officer, Chris finds and vets state-of-the-art investment choices for WealthSource clients — and explains important but complex investment concepts.

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