January Market Commentary

Market Commentary

US Stocks posted their worst month since the beginning of the pandemic on concerns over higher interest rates. To date, roughly a third of S&P 500 companies have reported fourth quarter earnings and 77% have topped analysts’ expectations, however forward earnings guidance has fallen short of investors’ expectations for many firms. Economic news showed the country grappling with the impact of the Omicron variant. US hiring fell significantly short of expectations with 199,000 jobs added in December. The unemployment rate fell to 3.9% from 4.2% in December and wage growth rose 4.7%. The pace of manufacturing eased and retail spending fell 1.9%. Inflation continued to climb, rising 7% over 2021, a four decade high and producer prices rose 9.7%. On the positive side, home sales jumped to a 15 year high in 2021. The US posted a strong GDP growth rate of 6.9% in the further quarter and a full year rate of 5.7% for its best year for growth in nearly four decades.

Foreign stocks declined over the month, driven by interest rate concerns and fears Russia will invade Ukraine. Eurozone consumer prices rose 5% over 2021, its fastest pace ever, adding to pressure on the European Central Bank (ECB) to reconsider its position about not raising its benchmark interest rate this year. Tensions remain high on the Ukraine/Russian border as Russia continues to expand its military presence. It has helped drive oil prices to their highest level since 2014 hitting $88.15 a barrel, up over 17% for the month. China grew at its worst pace since the beginning of the pandemic over the fourth quarter, up 4%. Recent measures of China’s factory activity and consumer spending have weakened showing the impact of Covid-19. In response to weakening growth, China’s central bank cut two key interest rates. Emerging markets outpaced developed markets in January, but have trailed developed markets over the last twelve months.

Bonds fell in January driven by changing investor expectations for Fed policy. Minutes from the Fed’s December meeting outlined that they were planning on completing their bond purchase program in March and that they expected to raise the Fed Funds rate three times in 2022. In addition, they discussed reducing the size of their bond portfolio, another form of monetary tightening. Then, after the Fed’s January meeting, Fed Chair Powell reiterated all of the above points and opened the door to more frequent and larger rate hikes than had previously been expected. The 10-year Treasury yield rose to 1.79% at the end of January, up from 1.50% to start the year. Over the course of the month, the 10-year Treasury yield hit levels last seen in January 2020, before the pandemic. Treasuries were the top performer for the month, while Muni and credit bonds were the top sectors for the trailing year. Shorter term bonds topped longer term bonds for the month and trailing year.