Market Monitor: January Mid-Month Update
Headlines and Highlights
- Inflation reaches 40-year high: Consumer prices rose at their fastest pace (7%) since 1982 in the 12 months ended in December, reflecting the economy’s rapid recovery from the pandemic and a supply chain still squeezed by COVID-19. The 0.5% monthly rise in December was lower than the more rapid price growth of October and November, suggesting inflation may be near a peak. However, its persistence at an elevated level has the Federal Reserve poised to hasten the end of its bond purchases and make multiple increases in the short-term interest rate this year.
- Market hit by rate-hike concerns: U.S. stocks pulled back in January following a strong finish to 2021 as investors focused on the Fed’s plans to tighten monetary policy and Omicron’s extended impact on supply backlogs and economic growth. Through January 18th, the S&P 500 was down 3.9%, small caps as gauged by the Russell 2000 fell 6.6%, and REITs as proxied by Vanguard Real Estate Index Fund gave back 6.5% after returning 40% last year. Bond prices fell as the 10-year Treasury yield rose; the Vanguard Total Bond benchmark shed 2.3%.
- Unemployment falls to 3.9%: The U.S. jobless rate dropped from 4.2% to within 0.4 percentage point of its pre-pandemic level as employment jumped and more people entered the labor force for the second straight month. Declining unemployment coupled with strong wage growth support the likelihood of continued strong economic growth.
Chart of Interest
Monthly march higher: U.S. inflation for 2021 was the highest in four decades at 7% even after the pace pulled back slightly at year-end.
Sources: U.S. Bureau of Labor Statistics, Altair Advisers
- The market volatility in early 2022 is perhaps overdue by historical standards following a year of unusual calm for U.S. stocks. Every year but three since 1987 has seen bigger drops in the S&P 500 than last year’s largest, 5.2%; yet the index has overcome those bouts of volatility to finish with gains in all but six years during that period.
- Emerging-markets stocks were the lone gainers in markets’ turbulent start to the year. The only major equities asset class to lose ground in 2021, they topped all others through January 18th with a 0.7% return. The other major non-U.S. benchmark, the iShares MSCI EAFE ETF proxying international developed stocks, was ahead of the U.S. with a narrow 1.4% decline. U.S. value stocks also gave ground slightly but were far ahead of major growth indexes, which tumbled 8% to 11%.
- The global recovery is expected to show further progress in 2022 but again is slowed by the coronavirus. The World Bank, among the first international organizations to issue 2022 projections reflecting the recent Omicron surge and related supply-chain delays, now estimates global growth at 4.1%, down from 2021’s growth of 5.5%.
- U.S. retail sales surged 16.9% in 2021, by far the strongest year on record, even after tailing off in December – partly a reflection of earlier online holiday shopping. Total sales for the fourth quarter were up 17.1% from a year earlier as consumers continued to spend despite declining sentiment.
- Wages rose 7% in 2021, the highest annual growth in decades, as businesses struggling to find workers offered signing bonuses, higher pay and better benefits. Wage inflation also creates broader inflationary pressure since employers try to offset higher labor costs by increasing prices on goods and services.
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