Entering 2022, persistently high inflation levels and the U.S. central bank’s policy direction posed one of the greatest risks to near and intermediate term equity markets. Unprecedented economic stimulus, both fiscally and monetarily, along with various supply chain issues during the past few years have sparked rising costs for a slew of raw materials and natural resources which, in turn, has translated to rising costs for consumers.

The Federal Reserve’s inflation outlook shift in late 2021, and its policy pivot from a dovish stance to a more hawkish one, jolted equity markets to start the year. Most major indices fell sharply to begin the year as interest rates jumped sharply. The Fed signaled for a faster end to quantitative easing, more frequent and possibly larger policy rate hikes, and began talks of quantitative tightening. Each of these proposed policy shifts were slated to begin in 2022. This news had investors scrambling to reposition their portfolios as markets attempted to reprice the reality of higher borrowing costs and less market liquidity in the near term.

While  financial markets were hyper-focused on the Fed’s next move, Russia intensified its army presence just outside the Ukrainian border heightening the likelihood of geopolitical risk. On February 24th, Russia launched an aggressive invasion of Ukraine generating a shocking catalyst that jolted markets. Russia’s invasion triggered yet another move from flight to quality assets as shown by the elevated CBOE Volatility Index (VIX) which ended the month of February just north of 30 which indicates a period of increased market volatility.

Through the first few months of the year equity markets, for the most part, have pulled back from their euphoric highs. The S&P 500 Total Return Index dropped 2.99% for the month of February and is now off 8.01% for 2022. As the S&P 500 traded around correction territory, the NASDAQ has also had a challenging time of its own to start 2022. The NASDAQ Composite Total Return Index fell 3.35% for the month of February and sunk 12.01% for its YTD return. International markets have painted a similar story to the U.S. with comparable challenges.  MSCI Emerging Markets Net Total Return Index February return lost 2.99% while the MSCI World Index fared slightly better losing 2.53%.

To illustrate the increased volatility markets have experienced to start 2022, we have compiled the S&P 500 Index daily intraday trading ranges for January-February and displayed their average ranges from the previous 20 years. The methodology used to calculate these as a percentage is (High Intraday price - Low intraday price) / Previous Closing Price. Each figure of intraday volatility was calculated then averages were drawn for the respective timeframes.  

As we can see below, the period spanning January-February 2022 experienced the most intraday volatility in the past 13 years, a level of action not seen since circa 2008-2009  during the Great Financial Crisis. Although this type of volatility measure may impart no predictability for the remainder of 2022, it’s interesting and maybe useful to note that both 2008 and 2009 ranked in the top 15% for both their (January-February) averages as well as the full year averages.

(Chart Source: Stadion; Data Source: Bloomberg)

Between the twin headwinds of geopolitical turmoil and a rapidly changing Federal Reserve policy landscape, markets have had much to endure thus far in 2022.

Despite the pessimism consuming today’s markets, if geopolitical concerns can plateau, and bearish traders decide to scrape profits, perhaps we’ll see a rebound in the near term. However, it is also possible that volatility and sentiment may not fully rebound. For now, we must wait and see while we watch for additional signs of market risk.  

Brian Rosso, CFA
Portfolio Management Analyst

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