Closing Thoughts for the Week

Small-caps, growth and high beta all outperformed, although so did utilities. While it can feel intense in the moment, geopolitical events like this one tend to be short-term in nature and generally don't derail the longer-term narrative. The big question right now is around the energy market. Last week’s risk signals, despite higher volatility and recent losses in equities, turned out to be right.

Short-term market sentiment over the past week or two is based on the latest Russia/Ukraine developments. Current sentiment probably still favors yields moving higher here, but I don’t think bonds are necessarily the toxic investment that the markets think they are. Gold is starting to look really interesting here. I maintain my contention that the real risk-off period in the markets hasn’t arrived yet.

This week, the 10-year Treasury note hit a yield of 2% for the first time since July 2019 and traders are pricing in a 60% chance of a 50 basis point hike at the Fed’s March meeting. The equity markets seem to be taking this all in stride for now, but the odds of this not ending well are high. The bond market is getting considerably less confident that the Fed is going to be able to steer the economy through this.