Global stocks fell in January due to increased risk aversion as markets continued to price at a faster rate hike pace by the G3 (US, UK, and ECB) central banks. Developed markets fell by -5.3%, with the S&P 500 (-5.2%) posting its worst monthly performance since March 2020 and its worst January performance since 2009.
The NASDAQ (-9.0 percent) under-performed the S&P 500 yet again, as the tech sector came under intense pressure as yields rose.
Major developed market government bonds fell, pushing yields higher as yield curves flattened due to tightening financial conditions caused by the Fed and the Bank of England signaling faster and earlier rate hike schedules in response to continued higher inflationary pressures.
Based on Fed Futures trading, the market had bet on 3 or 4 quarter-point hikes beginning early this year, but a shift toward 5 hikes now appears to be gaining traction. The Fed is expected to raise rates in March.
Value stocks easily outperform growth stocks, which were weighed down by a number of mega-cap technology and internet-related names. Consumer staples, real estate, and utilities, which are typically defensive, posted total returns (including dividends) of around 10%, while consumer discretionary stocks posted a small overall loss, dragged down by heavily weighted Amazon.com and Tesla.
Fixed income markets were weighed down by an increase in longer-term Treasury yields. (Trends and bond prices move in opposite directions.) In testimony before Congress earlier this month, Federal Reserve Chair Jerome Powell acknowledged that inflationary pressures, while still expected to abate over the next year, had become broad enough and had remained elevated long enough that the central bank may consider hastening the pace at which it tapers its monthly bond purchases. Indeed, the Fed announced an accelerated reduction in monthly asset purchases at their mid-month policy meeting, and a survey of policymakers revealed that a majority of them now expect three quarter-point rate hikes in 2022.
Inflation data also weighs on both fixed income and equity investors on a regular basis: consumer prices rose 6.8 percent in the 12 months ending in November, the largest increase since 1982. Producer prices increased by 9.6 percent, the most since records began in 2010. Consumer attitudes, on the other hand, suggested that inflation expectations may have peaked in November.
The overall tone of economic data appears to have improved over the month, which may have contributed to the equity market’s gains. When November payroll gains were reported on December 3, the economy added only 210,000 nonfarm jobs, less than half of consensus expectations. However, previous months’ gains were revised higher, and the unemployment rate dropped to a new pandemic-era low of 4.2 percent. The Labor Department reported on December 10 that weekly jobless claims had dropped to their lowest level since 1969, while a record 11 million jobs remained open.
Better news on the coronavirus front seemed to bolster sentiment as well. Further evidence emerged that omicron typically causes mild symptoms and may be limited to the upper respiratory tract, while the variant’s initial wave in South Africa appeared to be receding quickly. Moderna and Pfizer/BioNTech announced that their RNA-based vaccines were effective against omicron, albeit less so than against earlier variants, and Pfizer and Merck were granted emergency use authorization for COVID-19 pills. Investors were reassured further by President Joe Biden’s assurances late in the month that no “shutdowns or lockdowns” were planned in response to the latest wave of coronavirus cases. The Centers for Disease Control and Prevention (CDC) also shortened the recommended quarantine period for asymptomatic people who tested positive from 10 to five days.
The extent to which omicron would affect the economy was unknown, but consumers appeared unfazed, at least for the time being. According to MasterCard data, holiday sales increased 8.5 percent in December compared to the previous year, the largest increase in 17 years. In 2019, sales were also 10.7 percent higher than pre-pandemic levels. According to the data, retailers’ supply and labor challenges may be easing, allowing them to pass on higher costs to customers. However, Omicron had a significant impact on the travel industry, putting pressure on airline, cruise ship, and casino stock prices on a regular basis.
According to Tenjin, the January decline was so severe that market sentiment may have become overly pessimistic. We believe that now is a good time to invest in stocks with strong fundamentals, switching to a healthy mix of defensive/value stocks/ETFs and long-term growth assets. In Q1 2022, our algorithms will be updated to a new version as we plan to do more active management and hedging to keep up with any market surprises.
Investment advisory services offered through Tenjin AI Capital Advisory LLC, an SEC Registered Investment adviser. The author’s commentary which may include information and statistical data obtained from and/or prepared by third party sources TenjinAI deems reliable but in no way does TenjinAI guarantee the accuracy or completeness. All such third party data information and statistical data contained here is subject to change without notice. Nothing herein constitutes as a legal advice or any recommendation that any security,investment portfolio or investment strategy is suitable for any specific person. All investments involve risks and past performance is no guarantee of future results. The content on the website is for informational purpose only and does not constitute a comprehensive description of TenjinAI’s investment advisory. For complete disclosures, please visit tenjin-ai.com/legal