February 2022 Market Commentary: Ukraine/Russia Roils Capital Markets

Benjamin M. Lavine, CFA, CAIA, RICP
Chief Investment Officer, 3D

Data Source: Bloomberg

To read full commentary, click here.

February 2022 Highlights:

  • Global stocks continued to pull back from their strong CY2021 finish as prospects for tighter central bank policies responding to high headline inflation metrics and geopolitical risks (Ukraine/Russia) prompted investors to take financial asset risk off the table. We did, however, see signs at the end of the month of significant intraday recoveries off overnight lows following negative headlines. In February, the MSCI All-Country World Index (ACWI) dropped 2.6%.
  • Across major regions, MSCI Asia ex-Japan and Japan outperformed the other major regions in February, both returning -1.1% followed by MSCI Europe (-2.8%), the U.S. (S&P 500 down 3.0%), and MSCI Emerging Markets (down 3.0%). Broader Asia benefited from a combination of 1) COVID infection recoveries; 2) commodity exposure (especially Australia), and 3) safe haven perception (Japan).
  • Within the U.S., U.S. smalls caps outperformed large caps, which had not occurred in quite a while value stocks (primarily driven by energy) outperformed growth stocks, although growth stocks made a strong comeback late in the month, led by technology. The S&P 600 Index returning +1.4% versus -3.0% for the S&P 500. S&P Pure Value outperformed Pure Growth, returning +0.8% versus -1.8%, respectively.
  • With spot oil prices approaching $100/barrel, Energy stocks were the standout sector performer posting a positive return while all other major sectors were negative for the month. Besides Energy, traditional Cyclical sectors such as Industrials, Materials, and Financials and Defensive sectors such as Consumer Staples and Healthcare outperformed while Growth Cyclicals (Technology, Consumer Discretionary) and Real Estate underperformed.
  • Among risk factors, High Dividend and Value Factors outperformed all other risk factors while High Quality lagged. Momentum saw a sharp recovery last several days of the month.
  • Investment grade fixed income suffered from a rise in interest rates although longer maturity rates dropped from the intramonth highs in response to Russia’s military incursion into Ukraine. The 10-Year US Treasury yield, having risen as high as 2.18% ended the month at 1.83%. The Bloomberg/Barclays U.S. Aggregate Bond Index dropped 1.1% as did the Global Aggregate ex US Index.
  • S. high yield marginally outperformed the broader fixed income market even though credit spreads widened (the lower interest rate sensitivity helped offset the rise in credit costs). The Bloomberg / Barclays US High Yield Index returned -1.0%, slightly outperforming investment grade fixed income, while Bloomberg/Barclays Emerging Market Debt Local Currency dropped 3.4% as investors sold down emerging market debt exposure in reaction Ukraine/Russia.
  • Within equity alternatives, S&P GSCI Commodities Index returned 8.8% helped by a strong increase in energy prices and industrial metals, while S&P GSCI Precious Metals rose 6.1% on the strength of gold, silver, platinum, and palladium prices. The Dow Jones REITs Index returned -3.9%.
  • The global situation remains fluid where changes in prevailing narratives can lead to volatile swings in financial markets. However, just as with prospects of central bank tightening in the face of higher inflation, the Ukraine/Russian conflict, regardless of how/when the conflict is resolved, will leave a lasting impact on risk pricing ahead. For now, lower valuations across risk-based assets and higher commodity prices point toward greater uncertainty as a consequence of an unwelcome mix of stagflation and geopolitical tensions.

To read full commentary, click here.