Talks yield nothing, bonds yield more, volatility rages on

Stocks could not hold on to early gains yesterday as traders were unconvinced that “positive” talks between Ukraine and Russia were, in fact, positive. Bond yields rose, crude fell, and growth stocks led the broader market lower.

Et tu Brute?  Yes, me too, Julius. I couldn’t help myself. Alas, it is March 15^th and most of us who were educated in the US education system in the past 50 years have had that date emblazoned in our memories. It is, of course, the Ides of March.  In Shakespeare’s Julius Caesar, the soothsayer Spurinna warns the emperor to “beware the Ides of March,” implying that some sort of treachery awaited him. Ok, to make a long story short, it did…on March 15^th, 44 B.C. He got fired in the worst kind of way, assassinated by his fellow senators and best pal Brutus. The Ides of March predated the fabled tale but, surely Mr. Shakespeare ensured that its mystic influence would last the centuries. Searching with Google, you can find many other calamitous events that occurred on that very day. Some of my favorites include the cancelling of the Ed Sullivan Show (1971) and NASA’s first admission that the ozone layer was disappearing (1988). It has been many decades since I first learned of the Ides of March, and for many of them, the day simply came and went without any notoriety. We live in an era of science where all things can be explained with fact, right? Stock markets, economics, finance, accounting – those are all disciplines based on numeric fact. Why then are Wall Street folks so superstitious? 

The stock market is a living embodiment of all traders’ opinions…everywhere. As one might guess, with so many varying opinions, markets could behave somewhat vagrantly on occasion… er, most of the time. We search for patterns and signs that can, at a minimum, explain what might be going on, and with a reach, where things might be headed in the near term. I am sure that many of you know that it is no easy task and near impossible to accomplish successfully with any level of consistency. Traders, therefore, search far and wide for some sort of sign that will give them a leg up, even resorting to superstition. I am sure that you would not be surprised to learn that in times of high volatility, folks will search really far and really wide for answers.   

We probably don’t need to dig too deep to realize that the stock market has traded lower in recent weeks and why. Inflation is raging, there is a war going on in Europe, the Fed is likely to start raising interest rates tomorrow, and while the economy has recovered from its pandemic lows, the expansion is in its infancy, on tenterhooks. So, what is next? Volatility is high, that is a fact. The VIX volatility index is at 32 which implies daily market moves of up or down 1.98%, so we can count on that, and it will most likely, continue as long as the conflict continues in Eastern Europe.  The Fed, though quite vocal, is still a wildcard and will also continue to contribute to the volatility until it makes its intentions clear with actions. Inflation is not likely to go away any time soon, and it too will continue to contribute to volatility until it begins to trend down. The US economy is healthy today but that can easily change as the Euro Area economies are put under stress from Russian sanctions. If, when, and how that will influence the US GDP is unclear. On the bright side, companies are healthy though they are facing challenges, particularly in rising labor and material costs.  Employment is strong, wages are rising, and there remains a near record number of job openings.  That, being only a partial list of market drivers, should be enough to underscore the reality that there is no real pattern to help us determine where the market may be tomorrow. That may prove to be frustrating for someone who is seeking short term gains. But, for those of us seeking longer term success, there are some longer-term patterns that might help out. If we look back at the S&P500 to 1926 (Charles Schwab study), we see that on average, 5-year holding periods would produce a best-case scenario of +20.1% gains with a worst-case scenario of -12.5% losses. Not bad. If we extend that to 10-year holding periods, those best case / worst case scenarios go to +20.1% / -1.4%. Potential gains are some 14 times greater than potential losses. Now, THAT is a pattern that I am willing to stand behind. But, what about this ominous date? The Ides of March didn’t turn out too well for Caesar, but if we could stay focused on our long-term investment goals, things are likely to turn out better for us. I am told that Spring Equinox will occur this upcoming Sunday in the Northern Hemisphere. There are lots of spiritual implications of its coming. Me? I am betting that temperatures will begin to trend higher. I am good with that, for now.  

THE MARKETS

Market’s ended yesterday’s session after earlier hopes of peace gave stocks a temporary lift. The S&P500 traded lower by -0.74%, the Dow Jones Industrial Average gained a scant +1 point, the Nasdaq Composite Index Fell by -2.04%, the Russell 2000 Index gave up -1.92%, and the S&P500 ESG Index dropped by -0.88%. Bonds fell and 10-year Treasury Note yields gained +14 basis points to 2.13% (which contributed to the heavy losses on the Nasdaq). Cryptos slipped by -0.32% and Bitcoin climbed by +0.10%.

NXT UP

• The Fed will begin its 2-day FOMC meeting today, but we will have to be patient and wait until tomorrow afternoon to learn what the Fed is going to do.
• Empire Manufacturing (March) may have jumped to 6.4 from 3.1.
• Producer Price Index (Feb) is expected to have grown by +10 year over year compared to +9.7% in the prior month.