Market Monitor: January Update
Headlines and Highlights
- Markets recovering from tough start to year: Financial markets endured their worst month since the beginning of the pandemic on investor worries about interest-rate hikes, inflation, Omicron and geopolitical tension involving Russia and Ukraine. Stocks finished January with a 5.3% drop in the S&P 500 Index and declines in all asset classes despite the three-day rally that began at month-end. Small caps and growth stocks took bigger tumbles last month and the tech-heavy Nasdaq fell 9.0% in its worst January since 2008. The S&P 500 has regained about half of its 9% peak-to-trough drop amid strong corporate earnings and easing concerns.
- Fed sets stage for rate hikes ‘soon’: The Federal Reserve signaled it is ready to end its emergency monetary support for the economy in March, when it will wrap up its stimulative monthly bond purchases and likely begin a series of interest-rate increases. The Fed cut short-term rates to near zero in March 2020 when the pandemic struck the economy with full force. It hopes a measured cycle of rate hikes will not halt economic growth yet will tame inflation that rose to a 40-year annual high of 4.9% in 2021 as measured by its preferred gauge, the core PCE index.
- Economy decelerates after fourth-quarter surge: Despite an end-of-year slowdown due to Omicron, the U.S. economy grew at a 6.4% inflation-adjusted annual pace in the fourth quarter to finish 2021 with its biggest full-year increase in GDP (5.7%) since 1984. The average annual increase before the pandemic was about 2.3%. Carryover from the economy’s midwinter deceleration has reduced the first-quarter growth pace to less than 1%, according to the Federal Reserve Bank of Atlanta.
Selected Market Returns
Sources: Morningstar, Altair Advisers
- Sharp pullbacks in the market like the month of January are normal and often occur even in the midst of bull markets. While more volatility is likely this year than last year’s unusual calm, the economy is resilient and we do not view the January sell-off as indicative of broader weakness.
- The Federal Reserve’s plan to initiate interest-rate increases as soon as at its mid-March meeting reflects an economy that no longer needs emergency aid and should not be a major problem for markets. We believe the Fed will pause rate hikes if the economy shows signs of strain.
- Inflation is unlikely to drop significantly before midyear but we expect it to come down gradually beginning in the second quarter as Omicron-related economic disruptions fade and year-over-year price comparisons ease. Several categories whose huge price jumps can be traced to COVID-19 and the economy’s reopening last year, such as used car and truck prices, appear to be peaking or should soon.
- The pandemic shows signs of ebbing in some places but is still crimping the global economy as it enters its third year. It is clear that COVID-19 is not going away any time soon. But with the global vaccination rate growing and Omicron’s impact beginning to wane in the U.S. and some other countries, we anticipate the economic strain from the coronavirus to ease gradually as the year proceeds.
- Increased gridlock in Washington and the likelihood of even more following midterm elections have forestalled proposals for major spending and proposed tax hikes. The holdup for now in the proposed Build Back Better Act has fractionally reduced GDP estimates for this year but also may boost corporate earnings and markets as its tax increases will not be implemented.
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