Stocks ended January lower as investors dealt with concerns over inflation, the prospects of rising interest rates, and the pace of global economic recovery. The start of fourth-quarter corporate earnings season in January was positive, but not as robust as was seen in December. While the economy advanced at an annualized rate of nearly 7.0% in the fourth quarter, 2022 is expected to see a slowdown triggered by ongoing coronavirus disruptions and fading fiscal support. Escalating tensions between the United States and Russia offered further market agitation
A late rally wasn’t enough to prevent the major benchmark indexes from closing out one of the worst months since March 2020. Only the Global Dow was able to eke out a January gain. An end-of-month rally helped the Nasdaq avert the sharpest January decline on record. Nevertheless, tech stocks were hit hard in January as investors pondered how rising interest rates might weigh on that sector’s pricey valuations. The small caps of the Russell 2000 dropped more than 9.5%, while the large caps of the S&P 500 (-5.3%) and the Dow (-3.3%) slid lower.
Not surprisingly, most of the market sectors declined in January. Consumer discretionary fell the furthest, losing 9.7%, followed by real estate, which dropped 8.5%. Information technology, health care, and materials ended down 6.9%, while communication services lost 6.4%. Energy showed continued strength, climbing 19.0%. In fact, the price of crude oil climbed 17.0% last month for its biggest January gain in the last 30 years.
Despite the market downturn, there were some positive economic signs. Nearly 200,000 new jobs were added and fourth-quarter GDP advanced 6.9%. However, industrial production slowed, and new orders for durable goods decreased.
Eye on the Year Ahead
Market behavior and news flow in January reminded us of three important things.
First, the short-term, transitory inflation narrative that accompanied most of 2021 is falling apart. Central banks are beginning to acknowledge that inflation is more persistent, therefore shifting to a more hawkish monetary policy. Second, the shift in gears by the central banks led to further upside pressure on bond yields, which tends to be beneficial for value stocks. Third, the dampening effects of the Omicron wave on growth should prove to be temporary. We expect that as soon as the pandemic retreats, pent-up consumer demand, a strong order backlog, and receding supply bottlenecks should re-ignite global growth. The prospects of above trend growth in 2022 should translate into further improvements in corporate earnings despite an increasing cost base. But corporate pricing power will vary, both across and within sectors.
Despite a weak start, we still hold a favorable outlook for 2022
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