Since the start of the year, investors have been dealing with a very crowded carousel of concerns. On top of geopolitical uncertainty, there have been concerns about inflation, the Federal Reserve’s (Fed) policy outlook, and the impact on economic growth. As one of these concerns temporarily recedes from investors’ minds, another promptly takes its place.
For equities, the result of this has been a market that is more defensive and has a less positive tone than it did entering the year. Our work has shown that sectors that are more defensive, such as staples, utilities, real estate, and health care, have been performing well. Commodity-related sectors, like energy and materials, have also been strong. Meanwhile, sectors that are more economically-sensitive, such as financials and industrials, have lagged recently. Accordingly, we maintain overweight positions in the consumer staples, real estate, and energy sectors.
In fixed income markets, the market action has resulted in 2-year and 10-year Treasury yields reaching their highest levels since 2019. Following this sharp rise in rates, bond yields have become more productive again. These higher yields have also come with higher levels of rate volatility due to elevated levels of uncertainty. Additionally, we are seeing some opportunities in credit, with shorter-term investment grade corporate bonds offering the highest yields since 2020.
A look back
- Global equities declined for the week, with the MSCI ACWI snapping its three-week rally. While the S&P 500 finished the week down -1.2%, it outperformed international markets with emerging markets being the laggard.
- After inverting at the start of the month, the 2/10-year U.S. yield curve un-inverted and the slope is now 18 basis points (0.18%).
- The U.S. and Europe imposed further sanctions on Russia after allegations of atrocities committed by Russian forces were revealed.
A look ahead
- Investors will be focused on the upcoming inflation data with both consumer and producer prices being reported this week.
- Fed Governors Brainard and Bowman will give speeches this week. Investors will look for hints about the pace and magnitude of future hikes as well as the path of quantitative tightening.
- Economic releases: NFIB Small Business Optimism, Consumer Price Index, Producer Price Index, Retail Sales, Industrial Production, University of Michigan Sentiment.
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