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February 2022 Monthly Review

"Against the Wind"

By Loyd Johnson, Chief Investment Officer
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Loyd Johnson PhotoA Look Back

One of my favorite Bob Seger songs, Against the Wind, was released in 1980 and reached #5 on the Billboard Charts. In interviews, Seger said he pulled from high school years as a cross-country runner to form the song’s title-a metaphor for growing old. Many of us who grew up in the 60’s and 70’s can probably relate. The headwinds of life can get a bit stronger as the sands in the hour glass funnel through. We find similar headwinds blowing in the financial markets. February continued the downward slide in most of the major stock and bond benchmarks that we look at. In addition to the lingering effects that Covid continues to have on our economy, February brought boiling tensions between Russia/Ukraine to the forefront. The Russian aggression continues to play out in March, as the human toll is sadly substantial and the economic toll is quickly being felt. A trip to the gas station shows the quick rise in fuel prices…that were already stretching the pocketbook. Russia supplies around eight percent of the world’s oil supply, and the resulting disruption as countries around the globe levy wide-ranging sanctions is significant. Large-Cap U.S. stocks were down nearly 3% for the month, and -8% in the first two months of 2022. The lone positive performer in the table above was Small-Cap U.S. stocks, which were up 1.07%, but are still negative over 8.5% YTD. Core bonds were down less for the month, but if the year ended now, the negative 3.25% return would represent the worst calendar year return ever. The previous low-mark was in 1994 with a -2.92% return. There had been only three negative years for core bonds before last year—which was down 1.5%. It is now looking like we could see two negative years in a row, unless bond prices rally in the last ten months of the year. We point all this out because most investors are not accustomed-and rightfully so in light of their consistent yearly performance-to negative returns in their bond allocation. Commodities are not shown above, but they have been the best performer over the last year or so. As inflation has heated up, oil, precious metals and agriculture crops have done the same. We have already mentioned the pain felt at gas stations, but the same can be said for a trip to the grocery store. Prices are up almost across the board, as shoppers deal with the strong headwinds.

A Look Ahead

Two of the big drivers in pushing up stocks in 2020 and 2021 were the easy money available as the Fed took short-term rates to zero and the stimulus money the government made available to corporations and individuals in an effort to combat the effects of the Covid pandemic. Corporations were buying back their own shares at record rates and individuals were turning to stocks in an effort to find positive returns when faced with money market levels hovering near zero. There is something psychologically debilitating watching your money get the same return as your grandparents did when they buried the proverbial coffee can in the backyard. It makes you reach, as investors did. Well, those two big drivers are just about gone as the Fed has clearly signaled the likelihood of raising rates in their March meeting and the government spigot has been turned off…at least for now. We did get a positive jobs report recently. Nonfarm payrolls rose 678,000 in February and the unemployment rate fell to 3.8% versus expectations of 440,000 and 3.9%, respectively. There are still more jobs available than people looking. Surprisingly, wages were little changed in the month, up 5.1% over the last year, but less than what many thought. We added some alternative allocation recently and de-risked our bond allocation as well. For now, we push forward against those winds, knowing calmer days are ahead.