February 2022 Market Update
January was a rough month for stocks, as the S&P 500 index of large, U.S. stocks was down more than 5%. That was the worst start for the index since 2009. That’s an ominous start–historically there is some correlation between bad Januarys and bad years. However, the track record not foolproof, since as recently as 2020 the market was down in January only to finish the year with strong gains.
There are many things that determine the price and direction of stock markets, and momentum is just one of them. As I’ve written several times before, I think that the policies of the Federal Reserve will play a very important role this year. There is much anticipation that the Fed will raise short-term rates at least once, and will probably do so twice or more. Some analysts have projected as many as 8 rate hikes over the next few years. I don’t think it will come to that, but time will tell. If we do have that many rate hikes, it will be because inflation, and economic growth, are very strong.
The other big factor influencing stock prices this year will likely be corporate earnings. Historically, stock prices follow corporate earnings. We think that earnings can grow 10-15% this year, so it stands to reason that stock prices should benefit. However, if we do see rising long-term (10-year and longer) interest rates, or rising inflation, stock prices may not move at a rate corresponding to that 10-15% earnings growth. Higher inflation and interest rates usually mean that investors aren’t willing to spend as much on stocks, which could keep stock price gains in check.
Speaking of inflation, the December CPI reading showed a 7% increase over December 2020. That’s a shocking number, but think of it as more of a snapshot than a movie. Over the last 3 years, CPI has grown by an average of about 3.7%, barely above the 50-year average of 3.5%. I do think we could see higher than average inflation, but 7% isn’t very likely. 4-5% seems reasonable, but I’ll admit that will seem shocking after years of relatively low inflation.
International stocks and emerging markets stocks actually outperformed US stocks in January, highlighting the importance of diversified portfolios. Foreign stocks have lagged domestic ones for what seems like a decade now, with only a few bright spots. We’ll see if this was just a blip or is the start of a trend, but many international markets look undervalued compared to the S&P 500.
The market’s bad start saw the S&P 500 break below its 200-day moving average, indicating a change in trend to the downside. However, that trend lasted all of about a week, as markets rallied and (as of this writing) moved back above the trend line. Many of the other indicators I watch are positive, but there are a few that indicate that the market will not see the outsized gains that it enjoyed over the past few years. Transportation via trains and trucks has slowed, and initial jobless claims have ticked up. On the flipside, consumer confidence is high, and consumers are in great financial shape, with relatively low household debt. Corporations are in the same boat, with their strongest aggregate financial situation in more than 5 years. This money could be used for share buybacks or dividend increases, which could boost stock prices in the near-term. It might also be used for capital expenditures, such as modernizing factories, which could be beneficial for many years to come.
In all, I think this points to a year of transitions. Transitions away from the very accommodative monetary policies of the Federal Reserve, toward sustained inflation, and toward a re-opening economy filled with consumers who have money, and are likely looking to spend it.
In February, stock markets will be closed on the 21st in observance of Presidents Day. Also, Raymond James will start mailing 1099 tax forms mid-month, so if you haven’t received yours by the end of February, feel free to call your advisor to check on the status. It could be that your 1099 was amended and delayed.
Speaking of tax forms, 1099-R’s for IRAs were recently mailed. If you took a distribution from your IRA last year, you’ll get one. In fact, you might get two. That’s not an error–Raymond James made an administrative change mid-year, so you do need to make sure both 1099-R’s are reflected in your tax filing. If someone prepares your taxes for you, make sure they get both copies.
As always, these opinions are mine, and may or may not be the same as those of Raymond James. This is not a solicitation to invest, although we do invite you to review your portfolio with us to see if any changes should be made.
Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk including the possible loss of capital. Asset allocation and diversification do not guarantee a profit nor protect against loss.
As always, these opinions are mine, and may or may not be the same as those of Raymond James. This is not a solicitation to invest, although we do invite you to review your portfolio with us to see if any changes should be made.
Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk including the possible loss of capital. Asset allocation and diversification do not guarantee a profit nor protect against loss.
The forgoing is not a recommendation to buy or sell any individual security or any combination of securities.
Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment.
The forgoing is not a recommendation to buy or sell any individual security or any combination of securities.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Individuals cannot invest directly in any index. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Sector investments are companies engaged in business related to a specific sector. They 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. Investing in the energy sector involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. The companies engaged in the communications and technology industries are subject to fierce competition and their products and services may be subject to rapid obsolescence. Commodities and currencies investing are generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.
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