The year is off to an unfortunate start with January being the worst month since March 2020 for stocks, according to Bloomberg data. The S&P 500 fell by 5.3% as 10 of 11 sectors retreated.
The Fed acknowledged inflation is running too high at 7% on the most recent CPI report. They are expected to raise the Fed Funds rate by 25 bps in March and keep on raising it another 4 times as the year progresses.
The Fed will also halt their $140 billion monthly bond buying program soon. Some wonder why they are waiting, but Chairman Powell said they would warn investors before any changes occur. We all have fair warning now.
The Nasdaq index fell 9% in January even as strong earnings are being reported. High P/E ratio stocks and former highfliers with little to no earnings took the brunt of the pain.
The Russell 2000 index fell 17.6 % from the November 8, 2021 high. The Volatility Index (aka VIX) jumped from 16.4 on January 3rd to nearly 39 on January 24th.
Old school energy stocks powered ahead with XLE up 19% in the month, after last year's 55% rise.
After three strong years of gains the stock market sees the future as less rosy. AAII sentiment figures show 59% Bears and only 23% Bulls as investors look out 6 months. This is a bearish level not seen in years.
Future stock prices depend on future earnings which are expected to rise about 9% in 2022, according to Factset. Q4 earnings season is ongoing and results have been promising.
Inflation is a wild card and will drive the 2022 narrative. It is important to note that some of the catalysts that have caused high inflation are being phased out: the Fed has started to reverse course on quantitative easing and near-zero-interest-rates, government policies of stimulus checks and expanded unemployment benefits are dwindling, severe supply chain disruptions have eased. Wages continue to be a problem as energy and housing prices continue higher.
Wall Street is also concerned about geopolitical issues as another negative that could impact markets in the near term.
Russia threatens to move on Ukraine. Europe has placed its energy future in Russia's hands as Germany is now reliant on natural gas supply from its eastern neighbor. North Korea is testing weapons that can reach U.S. territories. China threatens Taiwan independence and therefore the world’s supply of semiconductors.
On the international economic front, China has moved to an easier monetary policy as their economy weakens. Europe is staying accommodative.
German rates on 10-year notes are now positive. The UK Central Bank has raised rates back-to-back for the first time since 2004.
The dollar remains strong versus most currencies. Crypto currencies have crashed. Gold is firm.
Ten-year U.S Government bond prices have dropped, as rates increased from 1.52% to 1.77%, but recently touched 1.90%.
The year has started rocky and could continue this road for some time. We will remain diligent understanding that 10%-20% stock market declines happen from time-to-time even in an ongoing bull market.
We hope you are enjoying winter weather. Stay safe. We wish you all a pleasant February!
Crown Wealth Group Investment Committee
Steve Lindgren - Chief Investment Officer & Partner
Doug Coppola - Executive Director & Investment Committee Chairman
Bob LeBeau - Research Director & Investment Committee Executive