January jitters may create buying opportunities

MARKETS AND INVESTING

January 31, 2022

Investors may be in for several months of volatility before the market can resume its uptrend.

Volatility was the trend for domestic and foreign equity markets in January, as well as the domestic bond market, albeit to a lesser extent. The broad-market S&P 500 flirted with a 10% pullback, for example. The ups and downs in the domestic equity indices stabilized briefly ahead of the Federal Reserve’s (Fed’s) meeting, which left short-term interest rates unchanged, but turned skittish shortly after Fed Chair Jerome Powell announced there was “quite a bit of room” to raise rates in the near future. The market seemed to have priced in three hikes this year but may have presumed the announcement meant the central bankers planned two more moves in response to inflationary pressures, explains Raymond James Chief Investment Officer Larry Adam.

Powell said that no decisions have been made as yet, but he could not rule out raising rates more aggressively if warranted. Chief Economist Scott Brown believes accelerated increases are not necessarily a foregone conclusion but notes that the labor market is tight, and inflation is well above the Fed’s long-term goal of 2%.

With uncertainty regarding inflation, economic slowing (though it remains at a healthy growth rate) and a Fed tightening cycle upon us, investors may be in for several months of volatility before the market can resume its uptrend, notes Joey Madere, senior portfolio strategist, Equity Portfolio & Technical Strategy. Headwinds also include geopolitical tensions between Russia and Ukraine as well as uncertainty over the direction of U.S. policy. In Washington, D.C., the current focus appears to be on economic competition and China policy, which has the potential to boost next-generation technology and domestic manufacturing, adds Washington Policy Analyst Ed Mills.

Performance reflects price returns as of market close on January 31, 2022. MSCI EAFE and the Bloomberg Aggregate Bond figures reflect January 28, 2022, closing values.

Sector roundup

Progress is slow on a revised and targeted Build Back Better bill, which could direct additional federal funding toward energy and renewables, healthcare and education, but the potential timeline for a final deal remains unclear.

Technology companies have borne the brunt of market weakness this year as higher interest rates put pressure on high valuations. While valuations remain relatively expensive, importantly, information technology (IT) demand remains strong and supportive of the sector’s backdrop. 

Tension on the Russia-Ukraine border drove up natural gas prices in the European market as Russia deliberately curtailed its export volume. Energy Analyst Pavel Molchanov believes Russia’s aggressive strategy is partly economic and partly political. In the meantime, the U.S. and other exporters are bolstering supply. Concern about excessive dependence on Russian oil and gas will likely accelerate energy transition towards wind, solar, and energy efficiency, notes Molchanov. 

Around the world

Almost all equity markets across Europe, Asia and the world’s other emerging economies saw losses in January. However, performance was best in the U.K. and selected emerging markets in Latin America due to a range of strong commodity sector performances. A little over half of early corporate earnings season updates in Europe and Asia have been ahead of expectations, but both February and March will provide more detailed insights.

Unsurprisingly, the latest International Monetary Fund survey showed a reduction in 2022 economic growth expectations. While a number of emerging market central banks raised interest rates during January, the People’s Bank of China continued to soften monetary policy in an attempt to counter slowing Chinese growth levels. The European Central Bank will not change its formal negative interest rate policy for at least a few quarters, but the Bank of England is set to further raise its interest rates in February.

The bottom line

The two-year anniversary of this bull market is approaching. This is the point where, historically, returns become more moderate; volatility increases; and investors become more discerning (e.g., selectivity becomes critical). It is important that investors remain patient, committed to their investment strategy and avoid any knee-jerk portfolio moves.

Your financial advisor can help address questions about how current conditions may impact your holistic plan. 

Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the Raymond James Chief Investment Office and are subject to change. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. The Russell 2000 is an unmanaged index of small cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. An investment cannot be made in these indexes. The performance mentioned does not include fees and charges which would reduce an investor’s returns. Small cap securities generally involve greater risks. International investing is subject to additional risks such as currency fluctuations, different financial accounting standards by country, and possible political and economic risks. These risks may be greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.