Market Update | February 2022
What is Driving Volatility?
- A Change in Federal Reserve Policy – For much of the last 10 years, investors have become accustomed to a Federal Reserve that would step in to support the economy, and by extension the investment markets (the “Fed Put”). With inflationary concerns mounting and the economy appearing to be on stable footing, the Federal Reserve can no longer be relied on in the same fashion. Without the Fed Put, investors are reassessing both their appetite for risk and the price they willing to pay for assets.
- The Russia-Ukraine Conflict – Tensions between Russia and the Ukraine have both immediate and long-term implications. NATO and its allies are focused on protecting Ukraine’s fledgling democracy and its importance as a buffer nation between NATO’s eastern most countries and the Russian Federation. While Ukraine is not a member of NATO, it has aligned itself with the West. The potential for economic sanctions combined with Europe’s dependence on Russian oil (at a time when there is already an oil supply-demand imbalance) could drive prices higher and exacerbate inflationary concerns.
- Equity Earnings – Early in this earnings season there were a few notable earnings misses and cautionary forward guidance, which added to the overall level of concern in the markets. As earnings season has progressed, the earnings outlook has improved. According to FactSet, earnings have exceeded estimates for 77% of the S&P 500 companies that have reported earnings thus far. However, future earnings growth rates remain an unknown, which has investors on edge.
- Equity Valuations – Equity valuations, especially in some areas of the market, are extended. With the concerns about future earnings growth discussed above and the threat of interest rates rising faster than anticipated, investors are re-evaluating the price they are willing to pay for stocks. Growth stocks, the biggest benefactors of lower interest rates, have borne the brunt of the market decline year-to-date. Through Friday, large-cap growth stocks have declined 13.5%, while large-cap value stocks have only declined 3.1%. With the Fed slowing its support and uncertainty surrounding valuations, we expect this period of price discovery, and the associated volatility, to continue.