“There are decades where nothing happens; and there are weeks where decades happen.” This quote—in addition to representing an exquisite irony—has proven as true in the first quarter of 2022 as it was when it was said by founder of the Russian Communist Party Vladimir Lenin over 100 years ago.
The last few months has seen an escalation of economic, market, and geopolitical risks across the globe. The S&P 500 has responded with the first negative quarterly return in two years. At the same time, the index is down just 5.2% from its all-time high, and we cannot shake the feeling that a fire alarm is going off in the building and few are rushing for the exits. That is not to say the building is burning, but the market today does not appear to adequately reflect downside risks. We believe a more cautious stance in portfolios is warranted, and we have taken down equity exposure in recent weeks.
Our latest Wilmington Wire blog post highlighted three interrelated risks to equity markets: 1) a commodity price spike associated with the war in Ukraine; 2) deteriorating sentiment among consumers and small businesses, in large part due to historic inflationary pressures; and 3) a hawkish Fed, which by the market’s expectations could hike the fed funds rate by 2.25% this year.
We need to add a fourth headwind to that list: the recent spike in COVID cases in China. The Chinese are working hard to stave off potentially high death counts that could ensue from the Omicron variant in light of the relatively poor vaccination profile of its overall population. To this end, the country has remained steadfastly committed to a “zero-tolerance” COVID policy and on March 27 announced a “rolling lockdown” of Shanghai, in addition to lockdowns in other less populous cities.
Shanghai’s population of 26 million people will be subjected to mass COVID tests, contact tracing, and isolation. Policymakers are doing their best to blunt the impact on economic growth and manufacturing, with shorter lockdown periods for key manufacturing firms like Apple supplier Foxconn. However, global supply chains remain stretched thin, and prolonged shutdowns of Chinese manufacturing plants or ports risk exacerbating shipping delays, input costs, and broader inflationary pressures.
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