Global equities continued their slide with a second consecutive monthly decline, as the fear of war and the Russian invasion of Ukraine kept investors on edge. The S&P 500, a benchmark for large cap US stocks, fell -3% in January and is down -8% year-to-date.
The Russell 2000 Index, which measures the performance of smaller US stocks and tends to be more sensitive to domestic policies but insulated from international geopolitics, gained +1% on the month for a -9% loss YTD.
Overseas equities lost -2% on the month for a -6% full-year return on the MSCI ACWI ex-US index.
Within fixed income, the Barclays US Aggregate Bond Index fell another -1% this month (-3% YTD), with concerns over rising rates outweighing the save haven properties of US Treasuries. After a flat month of January, gold prices rallied +6% in February amid a broad rally in commodities.
The Bloomberg Commodity index has advanced +16% in 2022, led by a +27% increase in crude oil prices.
During times of uncertainty and market volatility, we stress the importance of having a data-driven strategy focused on maximizing long-term value. Our proprietary “Three Dials” shows one change from last month’s reading, which we summarize below:
While the majority of geopolitical conflicts have limited long-term market impact, investors are clearly positioning for the possibility of a tail risk stemming from the situation in Ukraine. A breakdown in previous support levels and a series of lower lows has increased the likelihood of a sustained selloff, which has caused our Momentum Dial to move from Positive to Neutral as of the end of February.
Outside of their dominance in European energy markets, Russia remains a relatively small player in the global economic landscape, and the combination of geopolitical unrest and mounting sanctions appears unlikely at this point to derail the current positive trajectory of global growth.
Of note, US manufacturing data came in comfortably above consensus expectations for February. As such, our Fundamental Dial remains in a Positive position.
In the US, the current selloff has been entirely one of P/E multiple contraction, as earnings growth has been positive for the first quarter. We’ve long said that these markets have been priced for perfection, and the current landscape in Ukraine is far from perfect, which keeps our Valuation Dial in a Negative position.
Our Three Dials composite reading downshifts to a Neutral position as we seek more clarity out of Ukraine. Above all, this is not a sign of panic, but a measured approach to increase our downside protection based on our data-centric approach. We continue to preach diversification in this fluid situation, and we will communicate any changes accordingly.
Sources: Morningstar, ISM World, Factset