Economic Update 1-31-2022
- Economic data for the week included the Fed signaling upcoming rate hikes, a stronger-than-expected GDP growth report for Q4, and robust housing data, but a weaker durable goods report.
- U.S. equity markets ended mixed to higher in a volatile trading week, with large cap stocks outperforming small caps. Foreign stocks generally were negative, in keeping with a stronger dollar. Bonds fell back broadly along with higher interest rates following a hawkish Federal Reserve. Commodities gained, mostly in the energy sector—particularly due to weather, Ukraine, and market technicals in natural gas.
U.S. stocks ended the week mixed to surprisingly higher, despite a see-saw week, and the S&P reaching -10% correction territory briefly, based on a Jan. 3 peak date. Stocks started the week sharply negative, with investors contemplating the potential language and tone from the mid-week FOMC meeting, along with ongoing inflation and slowing growth woes. In fact, it was reported Monday was the largest trading day in history for U.S. stocks, with 40% of that volume based on ETFs. At this rate, January 2022 will end up as the most negative market month since March 2020—given that it’s been almost two years, we were about due for a correction, according to many strategist opinions. The Russell 2000 index of small cap stocks remain down almost -20% from November highs, near more extreme bear market territory. Interestingly, S&P implied volatility (VIX) had been fairly benign before ticking up to around 40, albeit just briefly—a region characteristic of corrections of the past decade. Trading of ETFs as a percentage of overall equity trading volume has ramped up to nearly a third, compared to last year’s average of 25% (per Blackrock data).
By sector, energy stocks gained 5% on the back of higher crude oil prices, with both technology and financials each also faring positively—surprisingly, to some extent—due to each being the anchors of their respective ‘growth’ and ‘value’ style groups. Industrials, utilities, and consumer discretionary stocks lagged, with returns below -1% each. Real estate was down only minimally.
Foreign stocks were held back by a nearly-2% rally in the U.S. dollar last week, likely exacerbated by hawkish Federal Reserve language (higher interest rates tend to be bullish for a currency relative to peers, all else equal). While shares in the U.K. gained, Europe and Japan declined. Stocks in the emerging markets fell back as well, led by weakness in China and Korea, due to concerns over ongoing Asian economic slowing, while Russian stocks gained with energy prices and some optimism about resolution with Ukraine.
U.S. bonds lost ground for the week across the board, with interest rates at the middle of the yield curve ticking higher, along with the more hawkish Fed language. Corporates from investment-grade to high yield and bank loans also fared negatively, as spreads widened. Most notably, the 2-year treasury note rose about 15 bp in yield during Chair Powell’s press conference, which was more open to tighter policy at a faster rate than markets expected beforehand. As implied by its maturity, the 2-year is somewhat of a proxy for the fed funds rate two years out. The 10-year yield vacillated, but ended higher, with the next significant technical level around 2.00%. Foreign bonds all fared negatively, in keeping with the much stronger dollar. The Bank of Canada surprised some by not raising rates last week, due to omicron concerns, but are likely to align with the Fed with hikes in a few months.
We’ve seen some comments from larger Wall Street firms about moving some fixed income back to treasuries (which were dramatically underweighted in some cases). This is interesting, not surprising, but also a reflection of the reactionary nature often seen in equity market drawdowns. Owning treasury bonds hasn’t been a place to earn a fortune over the last few years (with the 10-year yield still well below 2%), but they have acted as one of the few portfolio building blocks that zig when equities zag. The time to buy insurance is before the house catches fire.
Commodities rose by several percent, with gains in energy and agriculture offsetting declines in industrial and previous metals. The price of crude oil rose by 2% to just under $87/barrel, while natural gas prices spiked by over 20%—the latter due to colder expected weather and a late week event with traded gas futures. The build-up of Russian troops at the Ukrainian border has fueled some of the oil move higher, although natural gas prices tend to be more regional. Europe sources roughly half of its natural gas needs from Russia, complicating their involvement politically or militarily, with prices already high.
|Period ending 1/28/2022||1 Week (%)||YTD (%)|
|Bloomberg U.S. Aggregate||-0.36||-2.13|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
Sources: LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.
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