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Index Performance
U.S. broad-based indices finished the period in a sea of red for the fourth consecutive week. The Nasdaq declined 2.07%. The S&P 500 Total Return Index ticked down 1.87%, and the Russell 2000 Index also moved lower, ending the period down 1.65%.
Broad-based fixed incomes indices also ended the period, painted in red. The FTSE U.S. Broad Investment Grade Bond Total Return Index dipped 0.55%, while the FTSE Municipal Tax-Exempt Investment Grade Bond Index fell 0.54%. The FTSE High Yield Total Return Index tumbled 0.34%.
Macro Viewpoint
Oil continues to rise higher as geopolitical conflict involving the U.S. and Israel against Iran move into week four of six under the timeline initially proposed by the Trump administration. What was once framed as a short-lived conflict is increasingly taking on the profile of a more durable macro risk, particularly as tensions spill into Gulf oil facilities and unsettle global energy markets. The result has been a sharp reprice in crude. Brent rallied to $109.36, up meaningfully from the $75 level seen before the conflict began. While still well below the $146 peak reached during the Financial Crisis of 2008, the move is beginning to edge closer to level seen during the invasion of Ukraine. WTI crude is tracing a similar path, climbing steadily and moving closer toward prior highs (Figure 1).
In response, OPEC/OPEC+ agreed to raise output by 206,000 barrels per day for April in an effort to ease supply disruptions across the Middle East. As tensions deepen, economists are increasingly concerned that additional barrels may do little to calm demand concerns or meaningfully relieve price pressure. That strain is already beginning to show up at the consumer level. According to AAA fuel prices, the national average for regular gasoline has increased 25.3% over the past year, adding another layer of pressure to an economy already contending with sticky inflation, slower growth, and weaker-than-expected job growth.
Amid those conditions, the Federal Open Market Committee (FOMC) opted to leave rates unchanged. Chair Jerome Powell stated that, “The central bank would need to see tariff pressures fade and the price of goods declining,” while also acknowledging that supply constraints in the Middle East are amplifying near-term inflationary pressures. The Fed is attempting to preserve its dual mandate while avoiding a stagflation environment, a balancing act made difficult by higher energy prices and supply constraints. Markets reacted sharply and began to shift gears and price in a potential Fed cut in the latter part of the year. The LSEG Lipper Probability Distribution suggests the next three FOMC meetings (April, June, and July) are likely to deliver a similar outcome, with an 83.1% to 87.6% probability that the Fed will NOT cut rates. Global central banks are striking a similar tone. The Bank of Canada, Bank of Japan, European Central Bank, and the Bank of England have all opted to hold rates steady as policymakers assess inflationary pressures due to the conflict in the Middle East.
On the Yield Front
Yields climbed higher following the Fed’s report. The two-year Treasury yield rallied 6 basis points (bps), the five-year ticked up 9 bps, while the 10-year and 30-year yield jumped 10 bps.
Fund Flows by Asset Type
U.S. Money Market Funds have moved back into the lead, gathering an impressive $32.7bn in net inflows, a sharp increase from the prior week’s $1.8bn. Within the Equity universe, sentiment has turned notably weaker, with investors pulling $23.4bn from the asset overall, including a sizeable $36bn in outflow from U.S. Large-Cap Funds alone. That marks the sixth consecutive week of net outflows for the classification, as tensions in the Middle East Continue to pressure risk appetite. By contrast, U.S. Developed International Market Funds extended their winning streak, posting their twelfth straight week of inflows with $7.4bn, up modestly from $6.3 billion the prior week. If this pattern holds, the question becomes whether investors are beginning to rotate away from domestic large-cap exposure in search of stronger opportunities abroad.
Fixed Income, meanwhile, continues to attract steady demand. U.S. Taxable Bond Funds gathered $11.5bn in net inflows, while U.S. Municipal Bond Funds added another $1.8bn. Through the first 11 weeks of the year, U.S. Taxable Bonds have remained firmly in favor; U.S. Short/Intermediate Government & Treasury Fixed Income Funds (+$5.1bn), U.S. Government & Treasury Funds ($4.6bn), and U.S. Short/Intermediate Investment-Grade Funds (+$3.8bn). The strength in those segments points to a continued move toward quality, as investors seek shelter from rising geopolitical tensions and policy rate uncertainty. For now, defense remains the dominate theme.
Outflows continued across U.S. Commodity Funds, which shed $3.9bn for the third consecutive week. The weakness comes as gold has fallen 18.79% from its YTD high, nearly eliminating the bulk of its gains for the year.
