Monthly Market Risk Update: April 2022Learn more about this firm
My colleague Sam Millette, manager, fixed income on Commonwealth’s Investment Management and Research team, has helped me put together this month’s Market Risk Update. Thanks for the assist, Sam!
Markets rebounded in March, but it was not enough to offset earlier losses in January and February. The S&P 500 gained 3.71 percent in March, while the Dow Jones Industrial Average (DJIA) rose by 2.49 percent and the Nasdaq Composite increased by 3.48 percent. But the selloffs in January and February caused all three indices to end the quarter in negative territory. Despite the March gains, the S&P 500 lost 4.60 percent for the quarter, while the DJIA dropped 4.10 percent and the technology-heavy Nasdaq dropped 8.95 percent. The market decline to start the year is a reminder that risks remain that should be monitored going forward.
Recessions are strongly associated with market drawdowns; in fact, 8 of 10 bear markets have occurred during recessions. The National Bureau of Economic Research, which declared that a recession started in February 2020 when markets plunged, announced that it ended shortly thereafter. Despite that and the ongoing expansion since then, economic risks remain.
On the whole, the economic recovery continued in March, although uncertainty about the path forward remains. The primary risk is a deeper slowdown in growth as tighter monetary policy from the Fed starts to bite. Given the uncertainty surrounding inflation and the war news, we have kept the economic risk level at a yellow light for now. Although the most likely path forward is continued economic growth, the lowered confidence is a reminder that the recovery pace is uncertain, and we will likely see setbacks along the way.
Economic Shock Risk
One major systemic factor is the price of money, otherwise known as interest rates. They drive the economy and financial markets—and, historically, have been able to derail them. Rates have been causal factors in previous bear markets and deserve close attention.