Equity markets climbed a wall of worry in March as the S&P 500 index posted its first positive month of the year. Continuing geopolitical tensions combined with stubborn inflationary pressures and rising interest rates provided plenty of concerns for investors. The Fed hiked short term rates by 0.25% for the first rate increase in three years. The Fed also raised their expectation for inflation and interest rates going forward resulting in an upward revision in market forecasts to nine rate hikes in 2022.
The geopolitical turmoil between Russia and Ukraine remained at the forefront of investors thoughts notably with regards to supply chain concerns. This was especially pertinent in Europe as witnessed by the Eurostoxx50 index declining by 0.5% for the month. Inflation was also a concern as the annualized inflation rate rose to 7.5% in the Euro zone which is over three times the ECB target of 2%. A sell-off in European bonds resulted in higher yields.
In the U.S. March turned out to be the worst month for US Treasuries in nearly 20 years with the Bloomberg U.S. Government Bond Index falling over 3%. Yields increased across the curve and there were several points where the yield curve was inverted. This resulted in some analysts forecasting a recession, although one does not appear imminent. That said, rising rates and inflation provide a considerable headwind for risk assets.
March was the tale of two halves as markets declined for the first half of the month and then rallied strong during the second half. The sudden change in sentiment was a headwind for our longer-term hybrid momentum strategy causing losses in both our S&P 500 and Nasdaq 100 models. We also experienced losses in our counter-trend model. On the other hand, our relativevalue model performed quite well which kept losses in our Diversified Model to a minimum. It was a good example of diversification allowing us to preserve capital and fight another day.