Markets rallied in March, with the S&P 500 and major indices posting positive monthly returns for the first time since the start of 2022. A “behind the scenes” look at the month revealed a choppier path to reach those gains, as investors juggle Russia’s ongoing invasion of Ukraine, inflation and rising interest rates.
The current conflict between Russia and Ukraine has severely strained U.S.-Russia relations and could escalate to a larger European conflict. The U.S. and its European allies have imposed a widening array of economic sanctions on Russia. Economic penalties and export controls have been the main tools of retaliation for the West after President Biden and NATO agreed not to send troops to defend Ukraine. Global supply chain disruptions caused by the pandemic and Putin’s invasion of Ukraine, are turning U.S. companies toward local manufacturing, multiple supply chains, and to holding extra inventories to reduce business risks.
In an effort to combat inflation, the Fed raised interest rates for the first time since 2018. Fed officials signaled that they expect to lift the federal-funds rate to nearly 2% by the end of the year – an aggressive pace that would require several more increases by year’s end. Fed Chairman, Jerome Powell, noted that the committee is aware of the need to return the economy to price stability. As mentioned last month, the probability of a “stagflationary” outcome in the U.S. has likely risen. Historically, inflation at current levels was followed by a U.S. recession. During recent congressional testimony, Fed chair Powell said, “Soft landings have been relatively common in U.S. monetary history, e.g., 1967, 1984, 1994 and 1998.”
M&A activity remained robust in the first quarter of 2022, totaling $1.0 trillion globally, the seventh consecutive quarter that M&A exceeded $1 trillion. Technology was the most active sector, accounting for 25% of all deal activity, for a total of $259 billion. Financials and Real Estate followed, accounting for 13% and 12% of deal activity, respectively. Following years of record fundraising, private equity remained very active, announcing $291 billion of acquisitions, an increase of 18% compared to 2021 and accounted for 29% of M&A. The U.S. remained the preferred venue for dealmaking accounting for 51% of deal activity and totaling $521 billion, although that was a decline of 19% compared to 2021. Large deals were in vogue in the first quarter as deals like Activision Blizzard’s $67 billion acquisition by Microsoft and Allegheny Corp.’s $14 billion acquisition by Berkshire Hathaway propelled deals greater than $10 billion to $254 billion, an increase of 46% compared to 2021.
Lastly, in the world of convertible securities, volatility, war in Ukraine, inflation, and interest rates combined to weigh on the market. While convertibles remained less volatile than their underlying equities, the convertible market was still negatively impacted by these three major factors that led to investor redemptions, contracting growth multiples, and increasing credit spreads. With general uncertainty, convertible issuance slowed significantly. Conversion premiums have expanded, but there is still great opportunity in the market, and we have some reasons for optimism as the market started to find some footing at the end of March.
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Market Commentary March 2022