Globally, stocks sold-off even as oil prices came down from elevated levels In the United States,
the Dow Jones slipped 2.0% while the S&P 500 dropped 2.9%.
The tech-heavy NASDAQ tumbled 3.5% as the 10-year U.S. Treasury yield jumped 26 basis points to close the week at 1.99%.
Overseas, European stocks experienced a counter-trend rally and finished the week up 2.6%.
Emerging markets were the notable laggard with the MSCI Emerging Market Index down a sharp 5.1% as the MSCI China index plunged 9.2% on renewed concerns about the technology sector.
In 1970, energy goods and services accounted for about 13% of total U.S. consumption. Now, that number is just about 4.8% as the U.S. economy has become less energy intensive. That should help to mitigate the economic damage of higher energy costs. However, investors need to consider just how aggressive the Federal Reserve will be in its attempt to combat inflation that is largely derived from supply chain disruptions.
The Federal Reserve will very likely raise interest rate by 25-basis points at their March 16th meeting.
The question facing investors, is just how far will the Federal Reserve go? Currently,
the market is predicting the equivalent of seven rate hikes by the end of 2022.
However, we can’t help but wonder if the Federal Reserve will be forced to eventually reassess given that it is embarking on a new tightening cycle amid an economic slowdown and potential supply shock.
Shawn Snyder
Head of Investment Strategy,
Citi Personal Wealth Management
Last Week's Closeof the main usa stock market indices
S&P 5004,204
(-2.9%index down -2.9% from last week)
DJIAdow jones industrial average32,944
(-2.30%index change down -2.3% percent from last week)
NASDAQ12,834
(-3.5%index change down -3.5% percent from last week)
The Fed Decides
Not a great week for U.S. stocks last week.
The Dow Jones was down 2.0%, the S&P 500 was down 2.7%, and the NASDAQ was down about 3.5%.
It was a bit surprising given that oil prices fell 5.6% last week, which should have alleviated recession concerns a bit, but the 10-year U.S. Treasury yield jumped 27 basis points, which of course, hit technology stocks yet again.
The key takeaway is that markets are still trying to find their footing and looking for positive catalysts.
Clearly, what is happens in the commodity complex is of utmost importance with the potential for rising energy costs to
dampen global economic growth – particularly in the Eurozone. However, we think it’s important to remember that the
United States’ reliance on oil has changed dramatically since the 1970s.
In 1970, energy goods and services accounted for about 13% of total consumption.
Now, that number is just about 4.8% (see figure 1).
Figure 1. U.S. Energy Goods and Services Spending as a Percentage of Total Spending
This graph shows the U.S. Energy Goods and Services Spending as a Percentage of Total Spending
Sources: Haver Analytics and Citi Global Wealth Investments as of 4Q 2021.
Having come down materially, the economic drag from higher oil prices should be less than in prior supply shocks.
As our Citi Research colleagues point out, with energy related consumption accounting for about $750 billion of total consumer spending, a 20% rise in energy prices would mean about $150 billion of lost spending on other goods.
If mapped to real gross domestic product (GDP), it would potentially drag down growth by 0.7 percentage points. That is notable, but it is a far cry from the oil embargo of 1973 and 1974.
At the time, the price of West Texas Intermediate crude oil jumped from $4.30 per barrel in the fourth quarter of 1973 to $10.11 in the first quarter of 1974 – a 134% jump in prices.
During that quarter, spending on energy goods and services dragged down growth by 2.4%.
On its own, the rise in energy prices seems unlikely to drive the U.S. economy into a recession.
However, investors also need to consider the forthcoming U.S. monetary policy response.
It is widely expected that the Federal Reserve will move forward with a 25-basis point rate hike at its March 15 and 16 Federal Open Market Committee (FOMC) meeting with Fed Chair Powell having already said publicly that he supports a 25-basis point rate hike instead of a 50-basis point rate hike. However, it remains unclear if the Fed sees material risk to growth from the ongoing Russia / Ukraine conflict.
Thus far, the market seems convinced that the Federal Reserve will hike interest rates by the equivalent of seven rate hikes by the end of 2022 (see figure 2).
The Fed may also announce its plan to start reducing the size of its balance sheet by June.
Figure 2. Number of Fed Rate Hikes Expected by the End of 2022
This graph shows the Number of Fed Rate Hikes Expected by the End of 2022
Sources: Bloomberg and Citi Global Wealth Investments as of March 15, 2022.
Much of this has likely already been priced into markets with the S&P 500 down 11.9% since January 3, 2022.
Interestingly, the S&P 500 is virtually flat since the invasion of Ukraine on February 24, 2022.
With the U.S. stock market dealing with several headwinds, the path from here may be driven by two people…President Putin and Fed Chair Powell.
We remain hopeful that successful negotiations between Russia and Ukraine can be achieved and it would clearly be welcomed by the global community and financial markets, but even if such an optimistic scenario unfolds, an immediate removal of imposed sanctions seems unlikely and the shift in global energy supply chains is already underway with many nations seeking to limit their dependence on Russian fossil fuels.
As such, it will be critical for the Federal Reserve to monitor international developments and to recognize that its ability to combat inflation that is caused by supply chain disruptions is likely limited.
While inflation, as measured by the consumer price index, may head towards 8.5%-9.0% in coming months, we are not ruling out a pause in rate hikes at some point given that U.S. financial conditions are already modestly tightening (see figure 3), and the odds of a U.S. recession have climbed some (not our base case, but see figure 4).
As Steve Jobs once said, “the most precious resource we all have is time.”
The Fed may need to be reminded of that if it hopes to avoid a hard landing for the U.S. economy.
Figure 3. U.S. Financial Conditions Index vs. Periods of U.S. Recession
This graph shows the U.S. Financial Conditions Index vs. Periods of U.S. Recession.
Sources: Bloomberg, Haver Analytics, and Citi Global Wealth Investments as of March 15, 2022. Note: Shaded regions denote periods of U.S. recession. Note 2: The U.S. Financial Conditions Index summarizes different financial indicators and, because they measure financial stress, it can serve as a barometer of the health of financial markets. Financial variables typically include short-term Treasury rates, long-term Treasury rates, credit spreads, the foreign exchange value of the dollar, and equity prices.
Figure 4. Probability of a U.S. Recession in Next 12 Months
This chart shows the Probability of a U.S. Recession in Next 12 Months.
Sources: Bloomberg and Citi Global Wealth Investments as of March 15, 2022. Note: All forecasts are expressions of opinion, are not a guarantee of future results, and are subject to change without notice.
Market Indicators
Figure 5: 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
-2.0%
-9.3%
1.4%
1.9%
S&P 500
-2.9%
-11.8%
6.7%
1.5%
NASDAQ
-3.5%
-17.9%
-4.1%
0.8%
Instrument
Weekly Chgchange
YTDyear to date
12 Months12 month change
Level
10-Year Treasury Yield (%)
26.1 bps
48.1 bps
45 bps
1.99%
Gold ($/Oz.)
0.9%
8.7%
15.4%
$1,988.5
Oil ($/bbl)
-5.5%
42.0%
65.6%
$109.33
❮ 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 6: International Stock Market Returns
Index
Weekly Chg change in percent
YTD year to date in percent
12 Months12 month change
Div. Yield division yield in percent
Global
-2.3%
-12.1%
-1.7%
2.0%
Europe
2.6%
-14.0%
-6.0%
2.9%
Japan
-4.4%
-12.0%
-13.1%
2.3%
Emerging Markets
-5.1%
-11.7%
-18.3%
2.7%
❮ 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 4, 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 7: U.S. The Week Ahead
Date
Time
Event
Period
Consensus
Prior
3/16
8:30
Retail Sales Advance MoM
FebFebruary
0.4%
3.8%
3/16
8:30
Retail Sales Ex Auto and Gas
FebFebruary
0.4%
3.8%
3/16
10:00
NAHB Housing Market Index
MarJanuary
81.0
82.0
3/16
14:00
FOMC Rate Decision (Lower Bound)
3/16/2022
0.25%
0.00%
3/17
8:30
Housing Starts
FebFebruary
1700k
1638k
3/17
8:30
Building Permits
FebFebruary
1850k
1899k
3/17
8:30
Philadelphia Fed Business Outlook
MarMarch
15.0
16.0
3/17
9:15
Industrial Production MoM
FebFebruary
0.5%
1.4%
3/18
10:00
Existing Home Sales
FebFebruary
6.10m
6.50m
3/18
10:00
Leading Index
FebMarch
0.3%
-0.3%
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 15, 2022.
Shawn Snyder
Head of Investment Strategy,
Citi Personal Wealth Management