Keeping focused on your long-term goals

Weekly Market Commentary | Week ending January 28, 2022

 

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

Market Performance Snapshot* (Week ending January 28, 2022 and Year to Date)

  • Dow Jones Industrial Average®:  +1.3% | -4.4%
  • S&P 500® Index:  +0.8% | -7.0%
  • NASDAQ Composite®  Index:  +0.0% | -12.0%
  • Russell 2000® Index:  -1.0% | -12.3%
  • 10-year U.S. Treasury note yield: 1.78%
    • Up 2 basis points from 1.76% on January 21, 2022
    • Up 27 basis points from 1.51% on December 31, 2021
  • Best-performing S&P 500 sector this week: Energy, +5.0%
  • Weakest-performing S&P 500 sector this week: Industrials, -1.5%

     *Past performance is no guarantee of future results.

Most indices turn positive to cap very volatile week

Stocks experienced extraordinary intraday volatility during the week, with the Dow Jones Industrial Average dropping more than 1,000 points to start the week and the S&P 500 dipping into correction (10% below its most recent high) before reversing course. Major indices swung wildly throughout the week, rallying on Friday to finish mostly in positive territory—only the small-cap Russell 2000 lost ground. The NASDAQ Composite closed higher by less than 2 points. Treasury yields jumped after the Federal Reserve struck a hawkish tone, with Chairman Jay Powell strongly indicating an interest rate hike in March.

  • After a two-day policy meeting, the Federal Reserve’s Open Market Committee confirmed, “It will soon be appropriate to raise the target range for the federal funds rate.” At his post-meeting press conference, Chairman Powell added, "I would say that the committee is of a mind to raise the federal funds rate at the March meeting, assuming conditions are appropriate for doing so. I don't think it's possible to say exactly how this is going to go, and we're going to need to be … nimble about this so that we can respond to the full range of plausible outcomes."
  • The 10-year Treasury yield jumped 10 basis points after the announcement, while the 2-year yield, more closely tied to Fed movements, spiked 15 basis points, at one point surpassing 1.2%. Many market observers believe that longer-term yields (i.e., 10 years or longer) are driven primarily by expectations of economic growth and inflation. Treasury yields fell as the week closed.
  • The Fed also confirmed that monthly asset purchases will end in March, as previously communicated. The Fed now holds just shy of $9 trillion in assets, more than double the amount in February 2020. The question turns to how and when the Fed will start shrinking its balance sheet—by simply allowing existing assets to mature without reinvesting the proceeds in new assets, or by also actively selling off assets. Some investors fear the Fed is starting to tighten too late and will be forced to move too aggressively in coming months. This worry has heightened market volatility.
  • Powell said no decisions have been made “regarding the specific timing, pace, or other details of shrinking the balance sheet,” but he acknowledged “the balance sheet is substantially larger than it needs to be. There’s a substantial amount of shrinkage in the balance sheet to be done. That’s going to take some time. We want that process to be orderly and predictable.”
  • Looking at other asset classes, oil continued to rise, with the international Brent crude benchmark price topping $90/barrel for the first time since 2014. A combination of supply-and-demand factors and jitters over Russia-Ukraine tensions seemed to drive the move.

U.S. economic growth topped expectations in Q4, but may be cooling

The first reading on fourth-quarter GDP showed the U.S. economy growing at a 6.9% annual clip, exceeding economists’ expectations of 5.5% and triple the previous quarter’s 2.3% growth. Consumer spending, rising exports, and inventory increases boosted the number. For 2021 as a whole, GDP grew 5.7%, the fastest annual growth since 1984. GDP figures are adjusted for inflation.

  • The Personal Consumption Expenditures (PCE) price index increased 6.5% in the fourth quarter, compared with 5.3% in the third quarter. The Core PCE price index, excluding food and energy prices, increased 4.9%, compared with 4.6% in Q3.
  • There is evidence that Omicron dented growth at the end of Q4 and beginning of January. Jay Powell cautioned, “The recent sharp rise in COVID cases associated with the Omicron variant will surely weigh on economic growth this quarter.”
  • Consumer spending declined 0.6% in December, in line with expectations, likely reflecting the impact of Omicron and inflation. Durable goods orders declined 0.9% in December, a steeper drop than the 0.6% forecasted decline and much lower than November’s 3.2% gain. The decline in December was concentrated in transportation equipment.
  • IHS Markit’s early-January composite Purchasing Managers Index (PMI), which covers both services and manufacturing in the U.S., fell to 50.8, barely in expansion territory, after registering a much stronger 57 in December. Much of the decline appears to be attributable to staffing shortages as the variant raged. In a more positive signal, supply chain backups continued to ease. In Europe, the services sector slowed while manufacturing output increased. Businesses in the U.S. and Europe both reported raising prices for customers.

Corporate earnings show ongoing supply chain and inflation impact

While quarterly earnings have largely topped analyst estimates this month, some investors have grown concerned about the reports’ evidence of inflation, supply chain, and growth challenges.

  • Tesla exceeded expectations for revenue and income, delivering its largest quarterly profit yet, however supply constraints appear to be holding back growth. The company said, “Our own factories have been running below capacity for several quarters as supply chain became the main limiting factor, which is likely to continue through 2022,” and CEO Elon Musk said, “We will not be introducing new vehicle models this year. We will still be parts-constrained.”
  • Higher menu prices helped drive sales increases at McDonald’s, but the company still missed expectations for revenue and income, while operating costs rose 14% as the company and its franchisees hiked wages and shelled out more for food ingredients.
  • Johnson & Johnson fell short of sales expectations but topped earnings estimates, posting its highest quarter yet of vaccine sales, even as postponed elective procedures challenged its medical device unit and raw materials shortages impacted consumer products.
  • In a sign of the times, Abbott Laboratories benefitted from surging sales of its BinaxNOW and other rapid test brands, beating quarterly revenue and income estimates. However, sales and income forecasts for 2022 came in shy of expectations, with the company’s CEO noting, “Forecasting testing demand for more than a few months at a time has been challenging.”
  • Microsoft continued its run of strong quarterly earnings, beating estimates for both revenue and profit. A rise in revenue from Windows software licensed to personal computers compensated for a slight deceleration in cloud-related revenue growth (though still up 32%). Microsoft also issued guidance for the current quarter that topped analyst estimates.
  • Apple beat expectations with record-high revenue and income despite challenges around semiconductor chip supply. CEO Tim Cook said, “We expect supply constraints in the March quarter to be less than they were in the December quarter.”
  • IBM posted rising revenue and net income, exceeding analysts’ expectations, as the company continues its transition toward cloud services and software.

Final thoughts for investors

The Federal Reserve is on track to begin raising interest rates in March, while liquidity will be further reduced as the Fed shrinks its balance sheet. Markets are experiencing exceptional volatility as investors adjust to these changing dynamics. You needn’t face uncertainty alone—reach out to a financial professional to discuss your long-term goals.

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