Keeping focused on your long-term goals

Weekly Market Commentary | Week ending January 14, 2022

 

Commentary provided by Mark Szycher, Vice President,  Investment Specialist, AIG Retirement Services

Market Performance Snapshot* (Week ending January 14, 2022 and Year to Date)

  • Dow Jones Industrial Average®:  -0.9% | -1.2%
  • S&P 500® Index:  -0.3% | -2.2%
  • NASDAQ Composite®  Index:  -0.3% | -4.8%
  • Russell 2000® Index:  -0.8% | -3.7%
  • 10-year U.S. Treasury note yield:  1.79%
    - Up 2 basis points from 1.77% on January 7, 2022
    - Up 28 basis points from 1.51% on December 31, 2021
  • Best-performing S&P 500 sector this week: Energy, +5.2%
  • Weakest-performing S&P 500 sector this week: Real Estate, -2.0%

     *Past performance is no guarantee of future results.

Equities fall as tech concerns linger and retail sales, bank earnings disappoint

Early in the week, technology stocks stabilized after the prior week’s plunge as interest rates dipped slightly and some investors took advantage of buying opportunities. By Thursday the tech sector resumed its downward trajectory as investors re-assessed prospects for maintaining the high earnings growth experienced over the past couple of years. Lackluster retail sales figures and bank earnings spurred broader declines on Friday. The NASDAQ Composite, Dow Jones Industrial Average, and S&P 500 all fell for the week. The 10-year U.S. Treasury yield ticked up.

  • Inflation readings confirmed high and widespread price increases, though the pace moderated a bit in December. The Consumer Price Index (CPI) rose 7.0% during 2021, the biggest 12-month jump since June 1982, however the monthly increase slowed to 0.5% from 0.8% in November. Housing and used vehicles were the biggest contributors to the December gain, although costs for furniture, clothing, new vehicles, and medical care also rose.
  • Core CPI, with volatile food and energy prices stripped out, rose 5.5% over the past 12 months, the highest reading since February 1991. Core prices rose 0.6% in December after rising 0.5% in November. Energy costs actually declined in December, but rose 29.3% for the year with gasoline up nearly 50% in 2021. Food prices were up 6.3% during the year, significantly more than average annual gains of 1.5% over the last 10 years.
  • The CPI readings were in line with expectations; equities and the 10-year and 2-year Treasury yields were unfazed by the data.
  • The Producer Price Index (PPI), which measures wholesale inflation, rose 0.2% in December, below the expected 0.4% gain and well south of November’s 1.0% rise. The index still registered its largest yearly gain – 9.7% – since data were first reported in 2010.
  • PPI’s goods segment was down 0.4% for the month, its first monthly decline in nearly two years, driven mainly by a gasoline price decline of 6.1%. On the other hand, the services segment rose by 0.5%.
  • Higher prices and Omicron appear to have dented spending in December as retail sales declined 1.9% from November. Concerns about supply chain snags may have pulled some holiday spending into earlier months. Total sales from October through December were 17.1% higher than the prior-year period.
  • Sales for all of 2021 were 19.3% higher than in 2020. Sales at gasoline stations and eating and drinking establishments were each up about 41% on the year. The figures aren’t adjusted for inflation.
  • Initial unemployment claims rose to 230,000, however continuing claims fell by nearly 200,000 to 1.56 million, the lowest level since 1973 and further evidence of labor market healing.
  • On Friday, earnings season kicked off with major banks reporting quarterly results. JP Morgan Chase saw profits fall 14% as trading revenue declined and expenses rose. Looking ahead, the bank’s CFO warned “headwinds likely exceed the tailwinds,” which could lead to “a couple of years of sub-target returns.” Higher expenses at Citigroup contributed to a 26% drop in net income. Shares of Chase and Citi fell, however Wells Fargo shares rose after the company reported an 86% rise in net income from the prior year period. All three banks reported increased lending in the quarter.
  • While the mixed results weighed on financial stocks Friday, the sector is still performing well in 2022 as rising interest rates feed expectations of improved lending margins. The S&P financials sector is up 4.5% this month, while the KBW NASDAQ Bank Index, which tracks the largest national and regional banks, is up more than 11%.

Powell and Fed colleagues signal tightening ahead

In his confirmation hearing for a second term as Fed Chair, Jay Powell declared “the economy no longer needs or wants the very highly accommodative policies that we’ve had in place to deal with the pandemic and its aftermath” and pledged to move toward monetary policy that is “closer to normal,” while acknowledging “it’s a long road to normal from where we are.”

  • Powell continued his recent hard line on inflation, emphasizing the Fed is ready and willing to act on interest rates: “If we see inflation persisting at high levels longer than expected, then if we have to raise interest rates more over time, we will.” He also said the Fed’s balance sheet could be downsized “sooner and faster” than in 2017 when the Fed undertook a similar effort.
  • Powell tied the inflation fight to the Fed’s employment mandate, saying, “high inflation is a severe threat to the achievement of maximum employment” because it undermines price stability, a necessary condition for a long economic expansion that brings workers back into the labor market. At 61.9% in December, the labor force participation rate is 1.5% lower than in February 2020.
  • Other Fed officials echoed Powell’s comments. In her confirmation hearing for Fed Vice Chair, Lael Brainard said, “We will be in a position to [raise rates], I think, as soon as asset purchases are terminated,” expected in March. The presidents of the Atlanta, Cleveland, Richmond, and St. Louis Federal Reserve Banks also suggested the Fed may hike the federal funds rate starting in March. Several major investment banks have revised their forecasts to four quarter-point interest rate increases in 2022, starting in March. The federal funds futures markets are pricing between three and four 25-basis point increases during 2022.
  • As the U.S. deals with record-high Covid case rates and hospitalizations, Chairman Powell expressed optimism that Omicron will not derail economic growth: “What we’re seeing is an economy that functions right through these waves of Covid.”
  • One wild card in the Omicron outlook is whether China’s aggressive Covid containment policies cause further supply chain disruptions as the country imposes strict lockdowns to battle Omicron and potential subsequent waves.

Final thoughts for investors

With the Fed apparently on track to tighten monetary policy, market interest rates have risen, benefitting financial companies and causing investors to re-evaluate growth stocks. As markets adjust to a new policy paradigm, expect uncertainty and volatility. Speak with a financial professional about your long-term goals.

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