January 2022 Monthly Review
The New Year began with a strong bearish tone as global markets in both fixed income and equities saw a sharp “re-pricing” lower. Major catalysts to equity markets were higher interest rates from a firm Fed message on inflation, but also geopolitical worries around Russia and Ukraine. Cash was “king” for the first month of 2022.
Stocks saw their biggest monthly decline since the beginning of the Coronavirus in March of 2020, and their worst January since the financial crisis in 2009. If not for a 4% rally in large-cap names during the last two trading sessions of the month, equity indices would have notched their worst January on record.
- The interest rate-sensitive Nasdaq led the sell-off into “bear market territory”, and on January 24th the S&P index fell to a low of -11.64% before firming up to -5.17% total return for January.
- At one point on the same day, the Nasdaq fell to -16.19% for the month, ending at -8.96% in January.
- Inherent in the move lower was a continuing theme of value over growth, as the Dow Jones Industrial Average fell only -3.24% for the period.
The bond market was not a great hiding place during the month as inflation data and a “hawkish” FOMC, drove rates higher and continued to shift the yield curve into a “bear flattening” trend.
- The US two-year benchmark note rose 45 basis points during the month while the US ten-year note rose 27 basis points.
- Lower bond prices due to these interest rate moves impacted all subsectors of fixed income.
- Broad investment-grade indices fell by over 2%, corporate bond indices fell by over 3%, and the once buoyant muni sector decreased by 2.74%.
- High yield and emerging market debt were also not spared, falling by over 2.7%.
- Shorter duration bonds and cash-like portfolios fared much better as intermediate indices fell -1.47%, and 1-3 year bonds decreased by -0.72%.
- Cash and “cash-like” products did their job preserving value closing within +/- a few basis points of flat returns, although T-bill rates moved further from zero.
Markets saw volatility right out of the gate in 2022. Despite a December “miss” with nonfarm payroll data on January 7th, the unemployment rate fell to 3.9%, and average hourly wages rose unexpectedly to 4.7% year-over-year stoking inflation fears and Fed response. The yield curve had a sharp move higher, especially in longer yields. This set a tone for interest rate-sensitive markets for the month.
The following week many economists and market influencers prognosticated on upcoming Fed action.
- Goldman Sachs economists called for four 25 basis point hikes for the FOMC in 2022.
- Former New York Fed President William Dudley suggested the hawkish Fed is just getting started.
- JP Morgan Chairman, Jamie Dimon, said he would “be surprised if it’s only four hikes this year”.
- Later in the month, comments of a 50 basis point hike, more aggressive balance sheet reductions, and potential for up to seven rate increases filled the newswires. This “fueled the fire” for further volatility into the January 26th Fed statement.
The Fed and rates weren’t the only “game in town” last month. Investors have been weighing rising rates and slower growth in companies due to a higher risk-free rate. Earnings season, so far, seems to be mixed with some high profile “misses” in Q42021 (i.e. Netflix and Goldman Sachs). Earnings growth is expected to slow after last year (which had YOY comparisons boosted due to the impact of the initial onset of the coronavirus in 2020). Investors are contemplating the reduction of future earnings due to rate increases, and certainly, industries with higher long-term growth were punished in January.
Geopolitical risks, notably, the threat of war in Ukraine added to negative sentiment. What began as a rate-sensitive market, became more of a “risk-off scenario” as Russian troops moved to the border and diplomats were asked to leave. The geopolitical event drove markets to their lows on January 24th. Markets remained jittery as President Biden and EU leaders suggested deep economic sanctions against Russian aggression. Even without war, a prolonged stand-off and sanctions could increase energy prices globally, which would not be helpful to the global inflation issue.
The release and FOMC statement by Chairman Powell on January 26th was more “hawkish” than many expected, and he made very clear that the Fed’s top priority was to fight inflation with all tools available. These were key takeaways as four to five hikes have been priced into current short-term interest rates.
- “With inflation well above 2% and a strong labor market the committee expects it will soon be appropriate to raise the target range for the federal funds rate”
- The fed also released an outline for “significantly reducing” the size of the balance sheet.
- During Q&A, Chairman Powell suggested the Fed had “a lot of room to move interest rates,” suggesting a willingness to be aggressive to fight current levels of inflation.
The current strength in economic growth has allowed the Fed to focus its sights on inflation. On January 27th, Q42021 GDP was reported at 6.9%, much stronger than expectations of 5.5%. Initially, this was seen as a holiday season that had not been detracted by the Omnicron variant, but further details showed large inventory build-up. This suggests first-quarter GDP will be lower due to inventories created. Still, growth remains strong as current consumer sentiment was reported at a decade’s high. In addition, job openings remained abundant. Housing, including new home sales, were robust, and durable goods remained strong. Retail sales numbers did disappoint in December suggesting the Coronavirus spike during the holiday season impacted sales activity.
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