Globally, stocks surged with the MSCI AC World Index climbing 5.7% as oil prices eased amid growing rumors of a Russia / Ukraine cease fire. In the United States, the S&P 500 jumped 6.2% while the NASDAQ rocketed 8.2% higher. The Dow Jones rose a strong, but more subdued 5.5%. European stocks climbed by 6.1% while Japanese stocks leapt 4.5%. Emerging markets underperformed, but still returned 3.5% during the week. The 10-year U.S. Treasury yield spiked nearly 16 basis points to 2.15%.
The Federal Reserve decided to hike interest rates for the first time since December 2018. The central bank also projected that it would raise rates an additional six times by the end of this year and another three to four times in 2023. This was largely in line with what investors expected.
Calls for a U.S. recession have risen as the spread between the 10-year U.S. Treasury yield and 2-year U.S. Treasury yield have narrowed. We would point out that the yield curve has yet to invert, and even when it does, history suggests that a recession is not imminent and that equities can still move higher. During the last five inversions, it took an average of 14 months before the economy experienced a recession. The S&P 500 peaked about nine months after with an average return of 19.4% between inversion and its peak. The weakest return was 8.4% when the yield curve inverted in February 2000 and the S&P 500 peaked in March 2000.
Shawn Snyder
Head of Investment Strategy,
Citi Personal Wealth Management
Last Week's Closeof the main usa stock market indices
S&P 5004,463
(6.2%index up 6.2% from last week)
DJIAdow jones industrial average34,755
(5.5%index change up 5.5% percent from last week)
NASDAQ13,894
(8.2%index change up 8.2% percent from last week)
March Madness
It was so nice to see the NCAA college basketball tournament (often referred to as March Madness) kickoff with the stands full of excited fans once again. After two years of a global pandemic, it’s finally starting to feel like life is returning to normal (at least in the United States). Financial markets seemed a bit normal last week as well with the VIX, a measure of stock market volatility, falling to its slowest level since February 17th (prior to the Russian invasion of Ukraine, see figure 1).
Figure 1. Chicago Board Options Exchange Market Volatility Index (VIX)
This line chart shows the Chicago Board Options Exchange Market Volatility Index (VIX) from January 2021 to 2022 year-to-date. U.S. equity market volatility came down sharply after the March Fed meeting.
Sources: Haver Analytics and Citi Global Wealth Investments as of March 18, 2022.
This may reflect several factors: 1) investors gained some clarity on monetary policy, 2) oil prices continued to ease with West Texas Intermediate (WTI) crude oil prices falling 4.2% during the week, and 3) an increasing number of headlines suggesting that a Russia / Ukraine cease fire may be possible. Each of these factors are likely adding to a more risk-on tone, but it is hard to feel overly confident that market headwinds have permanently eased with supply chain disruptions caused by the Russia / Ukraine conflict and renewed COVID-19 lockdowns in China unlikely to be resolved quickly. Likewise, the path for Fed policy will be highly dependent on the inflation pressures caused by these disruptions.
As our colleagues in Citi Research suggest, the Russia / Ukraine conflict is a straightforward negative supply shock which has caused them to revise down their global growth forecast by 0.6 percentage points to 3.3% for 2022. On the flip side, their forecast for global inflation has been raised upward from 4.8% to 6.1% for 2022. In Europe, the conflict may shave off a full percentage point from 2022 growth – bringing down growth estimates from 3.3% to 2.3% for 2022. A Euro Area recession is expected to be avoided but can’t be ruled out.
In the United States, the debate about a potential recession is heating up, but we think such talk is still a bit premature. We understand why investors are concerned that the Federal Reserve may accidently tip the U.S. economy into a recession with the Fed projecting six additional rate hikes by the end of 2022 and another three to four rates by the end of 2023. However, the yield curve has yet to invert, and even if it does, recessions still take time to form with equities often moving higher prior.
Let’s look at the spread between the 10-year U.S. Treasury yield and the 2-year U.S. Treasury yield. Currently, the spread remains positive but has been narrowing in anticipation of additional Fed tightening. Traditionally, a 10s2s inversion has been a reliable indicator of a potential recession, with a recession occurring post-inversion 4 out of 5 times since 1985 (see figure 2). On average, a recession occurred about 14 months after yield curve inversion.
Figure 2. 10-Year U.S. Treasury Yield Minus 2-Year U.S. Treasury Yield (%)
This line chart shows the 10-Year U.S. Treasury Yield Minus 2-Year U.S. Treasury Yield (%) from 1995 to 2022 year-to-date.
Sources: Bloomberg and Citi Global Wealth Investments as of March 15, 2022.
However, even with the prospect of a recession on the horizon, equities have typically moved higher. During the last five inversions, the S&P 500 rose an average of 19.4% over nine months before peaking (see figure 3). With the Fed seemingly giving its “the buck stops here” speech on inflation at this week’s National Association of Business Economics (NABE) conference, the Fed appears adamant that inflation warrants a strong monetary policy response, but we suspect that there is still some upside left for U.S. equities. For a deeper dive into the trends driving markets over the past week, please see our, CIO Strategy Bulletin | Understanding an Extraordinary Week in World Events.
Figure 3. S&P 500 Returns After Yield Curve Inversion
This graph shows the S&P 500 Returns After Yield Curve Inversion. The S&P 500 tends to peak about nine months after yield curve inversion.
Sources: Bloomberg and Citi Global Wealth Investments as of February 2020.
Market Indicators
Figure 4: U.S. Stock Market Returns and Select Assets
Index
Weekly Chg change in percent
YTDyear to date change in percent
12 Months12 month change in percent
Div. Yield division yield in percent
Dow Jones
5.5%
-4.4%
5.8%
1.9%
S&P 500
6.2%
-6.4%
14.0%
1.4%
NASDAQ
8.2%
-11.2%
5.9%
0.7%
Instrument
Weekly Chgchange
YTDyear to date
12 Months12 month change
Level
10-Year Treasury Yield (%)
15.7 bps
63.9 bps
44 bps
2.15%
Gold ($/Oz.)
-3.4%
5.1%
10.7%
$1,921.6
Oil ($/bbl)
-4.2%
36.0%
74.5%
$104.70
❮ Swipe left for more
This table shows returns for various USA equity markets and select assets, in weekly, year-to-date and 12 month changes.
Strong corporate earnings are bolstering the equity market.
Figure 5: International Stock Market Returns
Index
Weekly Chg change in percent
YTD year to date in percent
12 Months12 month change in percent
Div. Yield division yield in percent
Global
5.7%
-7.1%
4.2%
1.9%
Europe
6.1%
-8.8%
-0.6%
2.8%
Japan
4.5%
-8.1%
-12.5%
2.2%
Emerging Markets
3.5%
-8.6%
-14.8%
2.5%
❮ Swipe left for more
This table shows the US Stock Market Returns and Select Assets and International Stock Market Returns
Sources: Bloomberg and Citi U.S. Wealth Management as of March 18, 2022. Note 1 (Equities): Global = MSCI All Country World Index (USD); Europe = MSCI Europe (USD); Japan = MSCI Japan (USD); Emerging Markets = MSCI Emerging Markets (USD). The equity index returns shown here are based in U.S. dollars. Returns for a non-U.S.-based investor can differ significantly depending on the effects of foreign currency exchange. Note 2 (Instrument): Gold = U.S. dollars per Troy ounce; Oil = West Texas Intermediate crude at Cushing, OK. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is not indicative of future returns. Real results may vary.
The Week Ahead
Figure 6: U.S. The Week Ahead
Date
Time
Event
Period
Consensus
Prior
3/23
10:00
New Home Sales
FebFebruary
810kthousand
801kthousand
3/24
8:30
Durable Goods Orders
FebFebruary P
-0.6%
1.6%
This table lists a number of key economic events, analysis reports and forecasts from influential institutions.
Sources: Bloomberg and Citi Global Wealth Investment as of March 18, 2022.
Shawn Snyder
Head of Investment Strategy,
Citi Personal Wealth Management