The markets were under a great deal of pressure in April as high inflation, a significant rise in interest rates, continued geopolitical turmoil between Russia and Ukraine, and a Federal Reserve with a credibility problem weighed on stocks and bonds.

The S&P 500 index fell 8.79 percent in April and the yield on the 10-year Treasury security rose from 2.32 percent to 2.89 percent as the Consumer Price Index (CPI) increased 8.5 percent year-over-year. Moreover, the high yield bond index saw interest rates rise from 5.46 percent to 6.84 percent over a four-week period. The rate of change and lack of confidence in the Fed is causing leverage to be unwound, and investor sentiment has turned decidedly more bearish.

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The month of March saw big swings in stocks, bonds, and commodities as the Russia/Ukraine war entered its second month, inflation rose to roughly a 40-year high, and the Federal Reserve signaled a significant change forthcoming in monetary policy.

The S&P 500 fell 5.26 percent in January, 3.00 percent in February, and 4.57 percent between March 1 and March 14, 2022, before gaining nearly 11 percent over an eleven-day period to finish down 4.9 percent in the first quarter.

A barrel of West Texas Intermediate crude oil rose as high as $130 in March as President Biden announced a ban on Russian imports of oil, although technically it does not go into effect for a few more weeks. In fact, a tanker carrying 680,000 barrels of oil left Taman, Russia on March 22, 2022 for New Orleans, LA. After April 22, 2022, the U.S. will no longer allow oil imports from Russia.

Nevertheless, in an effort to reduce gasoline prices at the pump, President Biden announced a plan to release 1 million barrels of oil per day from the strategic petroleum reserve. Oil ended March near $100 a barrel.

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The S&P 500 index fell 3.1 percent in February as the Russian invasion of Ukraine added to the growing list of uncertainties affecting markets. Oil spiked to more than $105 a barrel, while wheat jumped to its highest level since 2008 as Russia and Ukraine account for roughly 30 percent of all wheat exports. Prices for corn, iron ore, sunflower seeds, barley, among others produced in Russia and Ukraine rose in tandem.

This is happening at a time when inflation has been increasing for more than a year while the Federal Reserve has failed to act. We consider this reckless behavior. As recently as January 26, 2022, Federal Reserve Chairman Jerome Powell referred to “the relatively high-class problems” that come with the economic recovery, including “high inflation.” Inflation is running at a 40-year high, and real hourly earnings (meaning adjusted for inflation) have declined for 10 consecutive months.

The Fed has lost touch with reality. One day Fed Chairman Powell states inflation is a high-class problem, while another day he claims the Fed understands “that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food.”

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In our early December piece, we wrote “Of greater concern is whether the Fed is making another mistake.” And specifically, “any perceived mistake could result in a significant reduction in risk assets” as “hedge funds are exceptionally good at crowding the exits.” That is exactly how the year began.

A rough start to the year got even worse following a press conference by President Joe Biden whereby the S&P 500 index dropped 6.8 percent over the following three days. That is not a political statement – it is a fact. It is quite clear that the markets did not like his comments that suggested a “minor incursion” by Russia into Ukraine would be tolerated, and that the 2022 elections might not be legitimate.

The S&P 500 index declined 5.25 percent in January having been down more than 11 percent only a week before. The bond market sensing a major mistake by the Federal Reserve regarding inflation saw the 10-year U.S. Treasury yield rise from 1.35 percent on December 3, 2021, to 1.87 percent on January 18, 2022. The nearly 40 percent increase in interest rates over a seven-week period was a catalyst for a selloff in the U.S. equity markets, with the NASDAQ Composite falling more than 15 percent at one point in January.

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The month of December ended a volatile six-week period with the S&P 500 index and NASDAQ Composite experiencing several weekly losses and gains exceeding 2 percent and 3 percent, respectively. Concerns about Federal Reserve policy, inflation, the Omicron variant, and the future of the Biden administration’s Build Back Better, among other things, were responsible.

Nevertheless, the S&P 500 index gained 4.3 percent in December and was up 26.8 percent for the year as inflation spiked to multi-decade highs led by oil prices, which rose roughly 55 percent. Meanwhile, interest rates on the 10-year Treasury Note rose from 0.93 percent at the end of 2020 to 1.52 percent at year-end 2021.

The headline numbers by themselves were deceiving as there was quite a bit going on underneath the surface. The median S&P 500 stock has corrected 15 percent from its 52-week high, and as many as 208 stocks trading on the New York Stock Exchange and 738 stocks trading on the NASDAQ hit new 52-week lows on the week-ending December 3, 2021.

In addition, the Initial Public Offering (IPO) exchange traded fund was down more than 10 percent in 2021 despite the hype of the new issue market. It seems that a number of companies that had immature business models went public because money was available and interest was high.

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The S&P 500 index dropped 2.2 percent and 1.9 percent in two of the last three days of November on concerns about a new COVID variant (Omicron), rising inflation, and renewed tension over the federal debt ceiling. In November, the S&P 500 fell 0.8 percent, the yield on the 10-year Treasury Note declined from 1.55 percent to 1.43 percent, and a barrel of West Texas Intermediate oil dropped more than 20 percent to roughly $66.50.

At this point not much is known about the Omicron variant, but we do know that viruses generally mutate, and although they become more transmissible, they generally become less severe. Nevertheless, some countries have already issued travel restrictions. The initial knee-jerk reaction was “here we go again,” however, the Delta variant did not result in a shutdown and it remains to be seen what happens with Omicron.

Of greater concern is whether the Fed is making another mistake. We have been critical of the Fed because both the 2000 and 2008 bear markets in stocks had the Fed’s fingerprints all over them. Moreover, the Fed tends to deny responsibility and accountability, so there seems to be few lessons learned. For example, in 2007, former Federal Reserve Governor Edward Gramlich wrote a book titled Subprime Mortgages: America’s Latest Boom and Bust. A few years later former Fed Chairman Alan Greenspan wrote an article titled “Never Saw it Coming.”

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Following a 4.75 percent decline in September on concerns over the U.S. government debt ceiling, higher inflation, and a slowing economy, the S&P 500 index rallied 6.9 percent in October to a new all-time high. Meanwhile, a barrel of West Texas Intermediate crude oil rose 11 percent in October to more than $83, up more than 71 percent year-to-date and the highest level in 7 years.

The interest rate on the 10-year Treasury Note was 1.55 percent at the end of October, up from 0.93 percent at year-end. Moreover, the Federal Reserve is expected to announce a reduction in the amount of monthly bond purchases, which currently is running at $120 billion per month.

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The stock and bond markets came under increasing pressure in September as higher inflation, slowing economic growth, drama over raising the debt ceiling, and a possible default by China’s largest property developer weighed on markets. More importantly, the Federal Open Market Committee (FOMC) suggested that the Federal Reserve could begin to “taper” the pace of bond purchases beginning in November.

The S&P 500 index fell 4.75 percent in September with much of that coming in the last few days of quarter-end. The yield on the 10-year Treasury Note rose 0.22 percentage points to 1.52 percent in four weeks, and a barrel of West Texas Intermediate oil rose from about $68.50 to $75.

Political brinksmanship over the debt ceiling was front and center as Treasury Secretary Janet Yellen warned of “catastrophic consequences” should the U.S. default on its debt. She went on to say it could cause “a steep drop in stock prices” and put the economy into recession.

If you say things like that near the end of a quarter when liquidity is light, it is going to cause a reaction. Despite the rhetoric, however, the reality is that the democrats can raise the debt ceiling by themselves. This is about politics. But if you are going to play with matches, people can get burnt.

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The month of August saw an increase in the number of COVID-Delta variant cases, a botched withdrawal from Afghanistan with legitimate questions about the competence of leadership in a number of areas, several hurricanes, and further record highs in the S&P 500 index.

To be clear, this is not a political statement.  Too often investors get hurt when they ignore reality and do not confront “what is.”  For the record, over the years we have been equally critical of both sides of the aisle when the facts dictate. 

Despite the headlines, the S&P 500 gained 2.8 percent in August to close above 4500 for the first time in history.  The yield on the 10-year U.S. Treasury inched up to 1.30 percent, while the price of a barrel of West Texas Intermediate oil fell roughly 6.5 percent for the month after being down more than 15 percent mid-month. 

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