Hello all - we hope your year got off to a better start than it did for the markets.
There’s an old saying on Wall Street that “as goes January, so goes the year.” Let’s hope that’s not the case this year as stocks had their worst month since March, 2020, when the pandemic was in high gear.
For the month, the Dow fell 3.3%, the S&P 500 lost 5.3% - its worst January since 2009 - and the Nasdaq, which has a higher concentration of technology companies, was down 9.0% - nearly its worst January ever.
Here’s a look at the three major indexes this month:
Although January was rough, it could have been worse. The first three weeks were the worst EVER start to the year for the S&P 500.
Needless to say, volatility picked up in a big way this month. Stocks saw big swings every day - some days the market would be several percentage points higher to start the day, only to finish several percentage points lower (and vice-versa). It’s very rare to see trading like this.
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So, what’s going on? Why all the volatility?
It’s all about the Fed.
Really, it’s been all about the Fed for many years now. They’ve printed so much money through their stimulus in order to keep interest rates low, and that’s flowed into the stock market and propped up stock prices.
Bad news. Good news. It hasn’t mattered. The stimulus is like a pain killer that keeps the market flowing higher.
Take a look at stocks since 2008 - does this look like a normal market to you?
It’s all about the Fed.
Really, it’s been all about the Fed for many years now. They’ve printed so much money through their stimulus in order to keep interest rates low, and that’s flowed into the stock market and propped up stock prices.
Bad news. Good news. It hasn’t mattered. The stimulus is like a pain killer that keeps the market flowing higher.
Take a look at stocks since 2008 - does this look like a normal market to you?
However, it’s clear the party is ending. The high inflation levels are forcing the Fed to pull back on their stimulus and like a drug addict losing its fix, the markets are not happy about it.
In early January, the minutes from their December meeting were released and they suggested the Fed would be more aggressive in pulling back the stimulus. The markets weren’t happy, falling the most ever on a Fed minutes day.
In early January, the minutes from their December meeting were released and they suggested the Fed would be more aggressive in pulling back the stimulus. The markets weren’t happy, falling the most ever on a Fed minutes day.
Later in the month, the Fed held one of their policy meetings. Again, the Fed showed it was willing to pull back on their stimulus even more than expected and stocks fell sharply on the news.
We think the massive amounts of selling we saw this month may have been an overreaction. Yes, the Fed will pull back its stimulus soon, but historically, the markets tend to do fairly well until a few months into the reduction of stimulus. Of course, this time could be different since we’re in unchartered territory and have never seen this amount of stimulus before.
We’ll talk more about our outlook for the market later in this commentary.
We’ll talk more about our outlook for the market later in this commentary.
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Switching gears, corporate earnings were in focus as results from the fourth quarter started coming in.
Earnings haven’t been too impressive, although only about a third of the companies in the S&P 500 have reported so far. There have been a few standouts, like Apple and Microsoft, but many companies still have supply-chain problems and high inflation issues, but many see these problems fading later in the year.
Earnings haven’t been too impressive, although only about a third of the companies in the S&P 500 have reported so far. There have been a few standouts, like Apple and Microsoft, but many companies still have supply-chain problems and high inflation issues, but many see these problems fading later in the year.
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As for economic data, we’ll start with what everyone’s talking about, and that’s inflation.
Inflation at the consumer level, the CPI, again hit its highest level in 40 years.
Inflation at the business level (the PPI) moved slightly lower last month, though it still remains very high.
Small businesses are especially concerned with inflation. Bigger companies are better able to raise prices to offset these higher costs, but its more difficult with small businesses.
Other economic data looks mixed. Economic growth in the fourth quarter, measured by the GDP, was very strong.
However, both the manufacturing and service sectors weakened.
Retail sales turned lower:
While durable goods - which are items with a longer life, like a phone or dishwasher - keep rising.
Sentiment among the general public took a turn lower…
While small business owners became a little more optimistic…
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Where does the market go from here?
Stocks looked very oversold (cheap) late in the month and overdue for a rebound, which did appear the last two days of the month.
Below is a big image with some of the indicators we follow, showing how oversold they were. We won’t go into what the indicators are or how they work, but you can see they were at an extremely low level and that usually results in a rebound.
Stocks looked very oversold (cheap) late in the month and overdue for a rebound, which did appear the last two days of the month.
Below is a big image with some of the indicators we follow, showing how oversold they were. We won’t go into what the indicators are or how they work, but you can see they were at an extremely low level and that usually results in a rebound.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
