Market Update January 10, 2022
Photo by Erik Karits on Unsplash
Economic data for the week included a disappointment in December nonfarm payrolls, although the unemployment rate continued to improve. ISM manufacturing and services both fell back for the month, but remained solidly in expansion. Minutes from the Dec. Fed meeting showed a more hawkish tone than did the original statement released at the time.
U.S. equity markets fell back along with higher yields, hawkish Fed meeting minutes, and higher commodity prices. Foreign stocks fared better, with mixed results. Bonds fell back sharply, as a result of higher long-term interest rates. Commodities gained, due to a geopolitical-based spike in energy prices.
U.S. stocks started the New Year on a mixed note, with Wednesday’s Fed minutes pointing to perhaps a quicker pace of money tightening than initially expected, causing stocks to react to the downside for the week. Small cap stocks underperformed large cap by a percent. Rising Covid cases and hospitalizations from the omicron variant, notably abroad but also in the U.S., continued to weigh on sentiment. While is appears less severe, economic damage from potential absences is also significant.
By sector, energy stocks gained over 10% along with higher oil prices, followed by a 5% increase in financials, in keeping with higher interest rates. All other sectors were flat or negative to varying degrees, with technology and health care each down -5%, resulting in the largest Nasdaq decline in 12 months. Real estate also lost -5%, being sensitive to that same increase in yields.
Foreign stocks were mixed, with the U.K. and Europe positive on the week, while Japan fell back. Developed market equities were less affected by rising U.S. yields, although inflation also rose in the Eurozone and activity slowed. Emerging markets were flat on net, with mixed results across nations. Conditions in China were also mixed, with some economic measures faring better than expected, while property companies continue to face liquidity problems, and lockdowns due to a ‘zero tolerance’ Covid policy intensify. The latter is significant, notably with reports that Chinese-developed vaccines are far less effective generally. Impacts on manufacturing and trade flows remain to be determined.
U.S. bonds lost ground last week significantly, as the minutes from the December Fed meeting pointed to a more hawkish policy than assumed previously, as noted earlier. Markets adjusted to expectations, with the 10-year treasury rising by a sharp 0.25% to 1.75% (close to the highest level since the pandemic started). Credit fared slightly better, while floating rate bank loans ended as the only positive group. Foreign bonds also lost ground, particularly in emerging markets, although the dollar was little changed for the week.
Commodities gained on the week, led by the energy sector, while industrial metals and agriculture also fared positively; precious metals lost several percent along with interest rates rising. The price of crude oil rose by 5% to just under $79/barrel. Government protests in Kazakhstan, which have turned violent, as the result of rising fuel prices, have led to unrest in the region and higher petroleum and uranium prices (as the country is responsible for nearly half of global production of the latter). Production outages in Libya also added to supply concerns.
Sources: LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.