February was a volatile month for both equity and fixed income investors. It all started with a near record-high inflation report early in the month that stoked fears of a 50-bps rate hike at the Fed’s March meeting, exceeding the generally held expectation of a 25-bps increase. These concerns quickly waned as Russia shocked the entire world by invading Ukraine, causing global equity markets and interest rates to tumble. The end result was a -1.12% decline for the Bloomberg Aggregate Bond index and a near -3% decline for the S&P 500. Commodities were one of the few assets to weather the storm unscathed, gaining more than 6%, as sanctions and concerns over global oil supplies caused the price of WTI crude oil to surge above $95/barrel at month end (with prices topping $110/barrel in early March).
The S&P 500 continued its slide in February, declining by -2.99%, following a -5.17% loss in January. Like the prior month, the most significant pain was felt on the growth side of the market, where technology stocks declined by -4.90% and communication services names lost nearly -7%. Value stocks, while still negative on the month, saw their returns propped up by the energy sector, which gained more than 7% on the back of sharply higher oil prices.
This value/growth dynamic also held true in non-U.S. markets, where MSCI EAFE Value stocks declined by -1.36% compared to a -1.77% loss for the core index, while emerging value stocks fell by just -1.65% versus a -2.99% loss for the broad MSCI EM index. From a currency standpoint, the dollar had little impact on U.S. investor returns, despite benefitting from a flight-to-safety trade in the latter part of the month.
U.S. investment grade bonds declined by -1.12% in February, as the yield curve flattened, with rates rising at the short-end of the curve, while the long-end remained relatively stable (i.e., a “bear flattener”). One interpretation of the move could be that investors expect the Fed to raise rates in the near term to combat inflation; however, economic uncertainty exists as we look out over a more intermediate-to-long term time horizon. This upward movement in rates, coupled with increasing credit spreads, left investors with few places to hide in the bond universe, as all major fixed income sectors found themselves in the red during February, with the exception of cash. Not surprisingly, the greatest laggard on the month was emerging markets local bonds. The asset class declined by -5%, as contagion from the Russia/Ukraine conflict rattled emerging bond markets.
For a second consecutive month, commodities were a leading asset class, producing strong positive returns, despite broad-based declines in global equities and fixed income. Prices were higher across much of the commodity complex, especially for those products directly impacted by the Russia/Ukraine conflict. These include crude oil and gasoline, to which Russia and Ukraine are most commonly linked, but also key metals and agricultural products, such as aluminum, corn, and wheat. The end result was a 6.23% gain for the broad-basket Bloomberg Commodity index in February. This increases the index’s year-to-date gain to 15.56%, compared to an -8% loss for the S&P 500.
Closed End Funds
Closed end funds faced headwinds once again in February, as the Russia/Ukraine conflict drove equity market volatility higher and credit spreads wider. At a universe level, this resulted in discount widening of more than 100 bps, with the average fund ending the month at a discount of roughly 5% below NAV. This is the first time in 12 months that the universe has traded wider than its long-term average discount of approximately 4.5%.
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