Paul Tarins, RICP®,WMCP®,CSRIC™
Markets got off to a rocky start last January, leaving the S&P 500 US large-cap stock index lower for the month by -5.3% (‘SPY’ ETF proxy), its largest monthly pullback since the pandemic. At one point the index was down nearly -10% intra-day, meeting the technical definition of a long-overdue “correction.” Factors that ignited this bout of volatility, included:
- Hawkish Fed – The Federal Reserve doubled down on its messaging that it would be reducing the stimulus it provided to support the economy through the Covid shut-down. This had an immediate negative impact on bonds and particularly growth stocks throughout the month.
- Omicron Disruption – The Omicron variant has proven highly transmissible and yet mercifully mild for most people. Nevertheless, sick individuals mean missed work and slower sales, both of which were feared to be putting a damper on economic activity. The good news is that we may be past peak infection. As well, the January jobs report suggests the impact may be less than worried.
- Rising Inflation – Final inflation reports in 2021 indicated a +7% annual increase in consumer prices (AP News, “Inflation at 40-year High Pressures Consumers…,” 1/12/22). We may continue to see high prints in the months ahead with the disruptions caused by Omicron, but there is a good chance we are passing through the peak period.
- Valuation Overhang – While it was terrific to see stock indices end on highs for 2021, a concentration of returns among the largest technology stocks left the major indices at relatively high valuations, leaving them subject to some give back. We have seen a lot of air come out of these stocks at this time, greatly reducing that valuation overhang.
- Geopolitical Tensions – Russia has been staging military forces along the Ukrainian border since last fall. While worries over a possible invasion have been well circulated, talks to deescalate deteriorated last month. This fomented a rise in the global risk-premium for stocks.
That was quite the collection of factors for markets to digest in a relatively short period of time. Subsequent good news has been today’s January jobs report. Despite the surge in Omicron, payrolls grew by 467,000, four times above expectation with prior months also being revised higher. In addition, average hourly earnings rose +5.7%. This report should reduce the fear of immediate economic slowing ahead, including less risk of a Federal Reserve policy misstep (Yahoo!, “Stock market news live updates… strong jobs report…,” 2/4/22).
Importantly, Q4 S&P 500 earnings also remain robust at +29.2% thus far (56% of firms reporting) versus an expected +21.4% (Factset, “Earnings Insight,” 2/4/22). While this may not move the needle for year-end expectations, for now corporate America remains on target for another year of positive growth and earnings ahead.
Looking closer within January Global Asset Class Returns, we can see that small-cap stocks performed relatively worse at -9.5% (‘IWM’). Similar losses were incurred among growth-oriented indices, such as the technology heavy Nasdaq 100. Nevertheless, commodities once again posted positive returns of +7.9% (‘DBC’), and although overseas stocks and bonds of all types finished lower, they sustained less damage:
Global Asset Class Returns January 2022
As a result, balanced global portfolios fell just around -3.0% for the month, with diversification helping significantly as compared to 2021, when it was more of a hinderance.
Although we may continue to see heightened volatility in the year ahead and it may take a longer period of time to recover to all-time highs with last year’s buy-the-dip mentality now in the rear view mirror, it is comforting to know that stocks have rarely fallen into a full bear market retreat during similar past expansive economic periods, and that corrections in the 10-15% range once or more per year are quite normal and necessary for markets to eventually sustain further advance.
Source: Index proxies based on dividend adjusted ETF time-series data from CSI Data, Inc. Data considered dependable, but not guaranteed. Past performance is no guarantee of future performance or profitability. Statements herein do not constitute individual investment advice.
Paul Tarins is an investment adviser representative of and offers investment and advisory services through Portfolio Medics, a registered investment adviser. Nothing contained herein should be construed as a solicitation for investment advisory services. Sovereign Retirement Solutions and Portfolio Medics are not affiliated.