Weekly Market Update with Brian Ransom 18 February 2022

Welcome to the weekly market update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth and here’s what happened in the market this week.

Following the 9.7% decline in value for the S&P 500, the index has established a temporary sideways trading pattern over the last week and a half. We did experience a significant selling event on Thursday, February 10th.  

The primary news item for the week continues to be geo-political tensions in Eastern Europe between Ukraine and Russia. As violence and military preparations continue to build up in the region, disruptions to the European supply of natural gas continue to amplify and stocks are constantly reacting to any news on the situation. The implications for the markets are currently unknown.

However, given the number of arm-chair military strategists available out in the world, I thought I’d spend less time on the Ukrainian crisis itself and update the status of a few charts on market and economic risk.

The 10-year – 2-year treasury spread continues to contract. In a growing economy, this spread should remain positive. A negative reading on this spread indicates that bond investors believe the long-term economy is a better investment than the near term. Currently, the spread is positive but falling. A negative reading on the 10-2 has preceded the last 5 recessions.

The Equal-weighted index relative to the market cap weight index is a good measure of breadth within the market itself. When this graph is moving up and to the right, then the broader stock market is outperforming the stocks weighted heavily at the top. This pattern would indicate broader health within the market itself like we saw in the time period following the pandemic. When this graph starts to fall, like we saw beginning the summer of 2021, then outperformance is limited to the largest companies in the index. This would indicate a weak stock market. Since the beginning of January, the equal weighted index has outperformed the market cap weighted index which would be indicative of a healthy market once again even if the S&P 500 itself is declining.

Similarly, if investors are willing to take on more risk, then typically they choose “discretionary” stocks who’s goods and services are tied more closely to the health of the economy. Think cars and jewelry. If investors are risk-off, they’ll invest in staples like food and diapers. During the pandemic, investors were risk-off and we saw outperformance of staples relative to discretionary stocks. Beginning in April of 2020, that trend reversed and discretionary risk-on stocks outperformed. That is until November of 2021 when the trend reversed once again and staples outperformed. However, over the last few weeks, it appears that discretionary is once again pushing this graph downward indicating that investors are actually choosing to take on a bit more risk. This probably would not happen if we were entering into a recession.

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Sources:

1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved February 18, 2022, from FactSet Database.

2.Federal Reserve Bank of St. Louis, 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity [T10Y2Y], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/T10Y2Y, February 17, 2022.

3.FactSet Research Systems. (n.d.). S&P 500 Equal Weight relative to S&P 500 (Interactive Charts). Retrieved February 17, 2022, from FactSet Database.

FactSet Research Systems. (n.d.). S&P 500 Equal Weight Staples Relative to S&P 500 Equal Weight Discretionary (Interactive Charts). Retrieved February 17, 2022, from FactSet Database.

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