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February Market Update: Putin Invades Ukraine


Worries about whether Putin would invade Ukraine became a reality on February 23rd with troops crossing the border.    Stocks fell on this news and major indexes that were already close to correction territory from inflation worries fell into correction territory.  As with most large down days in the market, they were quickly followed by large up days. On one such day, the tech-heavy NASDAQ index saw a 7.0% swing in value first falling 3.5% before recovering and finishing the day up 3.5%!  The last week of the month and the first few days of March have seen similar volatility with a seesaw of large down-market days followed by a large up-market days.  These moves show how the market is trying to factor in the effects of Russian aggression, global geopolitical instability, higher oil prices, Federal Reserve rate hikes, and a market that may have become oversold.   The chart below shows a six-month path of the CBOE Volatility Index (VIX), which rises with uncertainty.


Six Month CBOE Volatility Index (VIX)

Source:  CNBC, CBOE

Short-term volatility will likely remain due to Ukraine, but the market did receive some answers to other unknowns during February.  First, we got confirmation from Fed Chairman Powell that the March rate hike will be a 0.25% hike, and not 0.50% that some had speculated.   Additionally, we heard that Powel would “proceed carefully” with future hikes as the geopolitical tensions provide more unknowns in already uncertain times.  Second, we have removed the uncertainties about heightened valuations of equities with the first quarter 2022 market correction.  What had been lofty price/earnings ratios (P/Es) at year-end, are now much more reasonable and likely the reason for some large up days at month end as investors prognosticated that equity markets were oversold and saw the weakness as good buying opportunities.    

February’s weakness was not as large as January’s with the S&P down 3.0% (total return) for the month.  Small cap stocks were up +1.1% for the month as they lead the initial decline starting in the back half of 2021. International equity indexes fared better than the U.S. in February even as war was being waged in neighboring Ukraine.   The MSCI EAFE (Europe, Africa, Far East Index) fell -1.8% in February versus the S&P’s -3.0% decline.   Another non-U.S. benchmark (ACWI-ex US) fell -2.0%. European stocks were already cheap relative to U.S. equities.   Emerging markets fell 3.0% in the month and their reliance on imported oil will continue to weigh on these regions.   We continue to be confident in our move last year to remove pure-play emerging market funds from our clients’ portfolios.

By sector, no surprise that energy once again was the best performing (and only positive) sector.   All other sectors were down for the month as seen below. Technology and communication sectors fared the worst.  Technology has been an extremely strong sector before and during the COVID pandemic. Valuations became stretched in this segment and the market reactions to future earnings guidance that was not stellar was brutal.  As an example, Meta Platforms (Facebook) fell 26% on the day it reported earnings and addressed Apple privacy changes.  Snowflake, the biggest software IPO on record, fell 16% when it reported earnings and gave poor revenue guidance.   


Treasury yields had a wild ride in February. Initially, the 10-year Treasury yield rose above the 2.0% threshold on market expectations of a growing economy.   Yields then reversed course after Putin’s invasion of Ukraine and investors flocked to U.S. Treasuries for safety.  Prices rose and yields fell.  The spread between the 2-year and the 10-year Treasuries hovered around 40 basis points most of the month (meaning the 2-year yield was 0.4% lower than the 10-year yield).   As of this writing (3/4/22), that same yield spread is just 28 basis points with the 10-year at 1.73% and the 2-year at 1.46%.  This is a function of the 2-year yield rising during the month in anticipation of the Fed starting a tightening phase, combined with a flight to safety to the longer-dated Treasuries due to Ukraine aggression.  We watch this spread closely as a flat yield curve (the middle blue curve in the chart below), could invert meaning the longer-dated yields are lower than the shorter-dated ones.  An inverted curve, which does not occur often, has been a recession indicator in seven past U.S. recessions since 1960.  Again, something we are carefully watching.

U.S. Treasury Yield Curve (3 time-frames)Source:  JP Morgan Guide to the Markets, 2/28/22

Municipals sold off in line with Treasuries.  The market has seen two straight months of outflows given the weak new issue calendar.  The municipal bond curve flattened during February with the yield on the short end rising more than 10-year munis.  At month’s end the spread between 2 year and 10 years municipal bonds was 24 basis points. In the past few months, the municipal bond market has sold off more than we have seen in some time.  Active municipal bond managers took advantage of better pricing and legged into the longer dated munis, increase portfolio yields as a result.  The chart below shows the big shift in AAA municipal bond yields (bond income) in the last few months.  

March is typically a weak month for municipals every year, so we could see more dislocations in the near-term.  It was good to see that the during the initial Ukraine invasion, the municipal bond market was incredibly stable.   We also remind municipal bond investors that during previous two Fed rate hike cycles, municipals have outperformed other high quality fixed income assets.


The good news on the economy is the strong string of new job growth reports in the U.S. in the past three months.  All the figures listed in the table below were above expectations and show that there is optimism in hiring and that COVID-19 worries are likely in the review mirror.  The strong growth in February is also a good launching place for interest rates to now rise.

Powell will be raising rates in a few weeks from an economic position of strength.  And raising rates is necessary given the continued increase in inflation that we have witnessed.  As the chart below shows, both the Core CPI and Core PCE (core excludes food and energy) are well above the Fed’s long-term 2.0% goals.  It’s time to remove liquidity from the economy where there are now too many dollars chasing too few goods.


Source:  BLS, Natixis

Some of the inflation brought about by supply-side disruptions should abate during the year and we see should see evidence of this as the port traffic begins to normalize (see chart below).

While inflation is at its highest level in nearly 39 years, it did not deter consumers from spending aggressively!  February’s core personal consumption expenditures (PCE) price index rose 5.2% from a year ago.  As a reminder this is the Fed’s preferred gauge of inflation.  Including food and energy price, the PCE grew 6.1%, the strongest gain since 1982.  The consumer is still purchasing, and higher prices have not altered many buying patterns at this stage. Another statistic reaffirms this view.  January retail sales rose 3.8% (February data not released until March 16th).   

Other important economic data points for the month are highlighted below:                                     

  • CPI – grew 7.5% in February, with core up 6.0%
  • PPI – up 1.0% versus an expected 0.5% increase 
  • Small Business Optimism – turned in a strong 97.1 reading
  • PCE – Fed’s favorite inflation gauge, rose to 6.1% yoy and 5.2% excluding food/energy
  • Retail Sales – rose 3.8% in January, rebounding from a December decline
  • Consumer Confidence – is still high (pre-Ukraine reading) at 110.5
  • US Leading Economic Indicators – the Conference Board LEI continues to increase, up 0.8%
  • ISM & PMI Indexes – still showed expansion mode over “50” at 55.5 and 57.6, respectively in February
  • Housing Starts – rose to 1.899 million, another strong month

The U.S. consumer has a high savings level, is mostly employed, and has strong demand to purchase goods and services. Demand is clearly not the issue with the U.S. economy, it’s the supply and while some disruptions may ease, higher prices from commodity and energy inputs are likely here to stay.   How that may affect consumer confidence and spending in the future remains to be seen, but it’s something we are keeping a close eye on.  


Cases continued to decline in February and many states altered their COVID response by lifting masking rules.  The CDC and the U.S. government also changed rules.  Today, more than 90% of the population lives in mask-free areas.   Dr. Scott Gottlieb, who has spoken almost daily on COVID-19 over the last two years, is optimistic that a normal spring/summer will commence with no further strains making masking and social distancing unnecessary.  We also hope this is the last time we feel the need to report on COVID-19 in this market review.  

COVID-19 New Cases in U.S.

Source:  New York Times 3/4/2022


For the next several weeks, we will no doubt see and hear about the tragedies occurring in Ukraine.  Financial markets will be taking their cue from not only the Federal Reserve in the near-term, but also from the geopolitical events and what those economic and financial impacts might be.  Market volatility (both big up and down days) will likely continue.  

History does provide us with some guidance in terms of how markets react, how far they fall, and how long it takes to recover.  We provide you with the table below of historical geopolitical events and stock market reactions.

Source:  LPL Research, S&P Dow Jones Indices, CFRA 1/6/20

As a reminder, volatility in equity markets is normal.   It usually comes about due to a negative event or perceived threat to economic growth.  Many of our clients have seen a chart similar to the one below that we use to remind ourselves that the last three-year, cumulative 100%+ return of the S&P 500 is not normal.  Market ups and downs are normal, but 75% of the time, markets end with a positive return.   

Source:  JP Morgan Private Bank

Historically, buying the S&P 500 down 10% from a recent high has rewarded the buyer a double-digit positive return over the next 12 months.

Again, we are, in some unchartered territory, it makes sense to feel a bit of unease about the financial markets.  Sandy Cove Advisors has sent out two FLASH REPORTs in as many months to assuage fears, but also been connecting with clients who may still feel uneasy.   If you would like to have further discussions with our team, one-on-one, please do not hesitate to contact us.

Lastly, our thoughts and prayers are with the Ukrainian people at this time.