Gabelli Funds, LLC

Market Commentary February 2022

U.S. stocks closed lower for the month of February as inflation and monetary policy implications continued to be key fundamental risks for investors. Russia’s invasion of Ukraine sent shocks throughout global markets, marking an escalation to a conflict that began in 2014. This represented the largest military assault by one European state on another since World War II. Market volatility spiked as investors gage the economic impacts of war. Russia’s invasion of Ukraine is an unprecedented move of aggression by President Vladimir Putin, who is now plagued with a plethora of new sanctions from the U.S. and Europe aimed at restricting Russia’s economy. Despite Ukrainian resistance holding firm, Russia has intensified its assault.
Although a more hawkish Fed has already been a main theme for markets this year, the rise in January’s U.S. Consumer Price Index may be an indication that the Fed could be more aggressive in raising rates than originally anticipated. The U.S. Consumer Price Index rose 7.5% year-on-year, leading to the largest annual increase in inflation in 40 years. The probability of a “stagflationary” outcome in the U.S. has likely risen.
COVID-19 trends improved during the month, with cases dropping ~90% from a pandemic record set just over a month ago during the spread of the Omicron variant. To date, 215 million Americans are fully vaccinated, representing ~65% of the population.
After several false starts, a rotation from Growth to Value may finally gain traction and provide a tailwind for the appreciation of the undervalued, cash generative entities we favor. As Value Investors, we continue to navigate the current market volatility as an opportunity to buy attractive companies, which have positive free cash flows, healthy balance sheets, and are trading at discounted prices.
Merger Arb activity remained strong in February with many deals that closing or made considerable progress towards closing. Xilinx completed its deal to be acquired by AMD after the parties refiled for antitrust approval in the U.S., and IHS Markit was acquired by S&P Global after the companies received foreign antitrust approvals. We Newly announced deals in February included First Horizon’s $13 billion deal to be acquired by TD Bank, South Jersey Industry’s $8 billion deal to be acquired by IIF, and Tower Semiconductor’s $5 billion deal to be acquired by Intel.
Lastly looking toward the convertibles market, February was another difficult month. In the U.S., with inflation stubbornly high, much of the month was spent focused on the fed and how they will raise interest rates. This continued to weigh on growth equities and by extension had a negative impact on convertibles. As the month ended, the war in Ukraine upset markets further, adding to volatility. Convertibles have outperformed their underlying equities through this period, but the drawdown has been larger than we anticipated coming into the year. Issuance has been off to a slower start than last year but we are starting to see it pick up.