Week in Review
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Equity Markets:
The markets started off the new year in the red. The S&P 500 was down 1.8% as we saw a strong rotation back into value and cyclical stocks. Mega cap growth and technology had another rough week. The Nasdaq was down ~4.5% for the week. A spike in interest rates was the major driver for downward pressure. The minutes from the December Fed meeting were released on Wednesday, and it appears the markets are not fully prepared for the apparent policy shift that is being conveyed by the Fed.
Fixed Income Markets:
The 10-yr Treasury ended the week at ~1.76%. This is the highest level since the start of the pandemic. Rates jumped on the back of the Fed minutes from their December meeting being released. The minutes revealed the aggressive posture from the Fed in their intent on dialing back stimulus that helped the economy push through the pandemic.
The market anticipated interest rate hikes and tapering of the bond purchase program in 2022. What wasn’t known was the timing of the actions. The Fed minutes revealed that not only will the Fed accelerate the taper, but will likely start reducing their balance sheet earlier than expected. When reducing the balance sheet, which currently stands at $8.3 Trillion, the Fed will let securities mature and not invest the proceeds. With the first expected rate hike around March, the Fed could start reducing their balance sheet shortly after.
The pace of reduction is also at the top of most market participants minds. The minutes stated that “the appropriate pace of balance sheet runoff would likely be faster than it was during the previous normalization episode”. The economy may not be in the clear from the pandemic, but the Fed believes the economy is strong enough to withstand this and does not need the additional support that has been provided since March 2020.
Economic:
Job numbers disappointed on Friday with just under 200,000 jobs created in December, well below the anticipated 422,000. The pace of job creation may have slowed to end 2021, but there were still bright spots from the report. The unemployment rate fell to 3.9% which was better than expected; this reading is the lowest since February 2020.
Looking Ahead
Equity Markets:
Interest rates were a major driver for the stock market last week, and we see this continuing. A rapid rise in interest rates is not positive for the equity markets in the short term. If we continue to see a steady climb in rates, volatility should be expected as the markets digest a higher rate environment.
Technology and growth stocks may be challenged going forward if we continue to see rates climb at a fast pace. This is due to investors’ risk appetite shifting due to the belief that profit growth will be subdued by higher interest rates (i.e. financing costs). It’s important, however, to be mindful that not all technology stocks are created equal with varying degrees on the valuation spectrum. The rotation into more economically sensitive sectors and value stocks could have strong tailwinds if rates continue their march higher. Having a well-diversified portfolio with exposure to all sectors of the market is important at all times, but especially now. It is nearly impossible to time when a strong rotation will happen, and when it does, it is usually very swift. Over a full market cycle, missing these rotations can be detrimental to an investor’s total return, and that is why we believe maintaining these exposures is so important through the good and bad.
Fixed Income Markets:
Many believe we have reached a pivotal point in the fixed income markets. The heavily followed 10-yr treasury rate is at the highest level since the pandemic began. Rates have moved upwards and challenged the current levels but retreated back down on multiple occasions over the past year. The Fed’s recently announced, less accommodative stance, could be the catalyst to keep rates moving higher. Interest rates will be heavily watched since they are likely to have the largest impact on the markets in the near term.
Economic:
Many important economic numbers will be released this week. The most watched reading will happen on Wednesday when the CPI is released. Inflation was the hot topic for the last of half of 2021. The most recent CPI reading was the highest in 3 decades, 6.8% YOY. A milder reading would be welcomed by markets. We will also see readings for PPI, Export & Import Price Index, retail sales, and a preliminary number on consumer sentiment.
Important Disclosures:
Investment Advisory Services offered through Krilogy®, an SEC Registered Investment Advisor. Please review all prospectuses and Krilogy’s Form ADV 2A carefully prior to investing. This is neither an offer to sell nor a solicitation of an offer to buy the securities described herein. An offering is made only by a prospectus to individuals who meet minimum suitability requirements.
All expressions of opinion are subject to change. This information is distributed for educational purposes only, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.
Diversification does not eliminate the risk of market loss. Investments involve risk and unless otherwise stated, are not guaranteed. Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. Investment risks include loss of principal and fluctuating value. There is no guarantee an investing strategy will be successful. Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor’s Index Services Group.
Services and products offered through Krilogy® are not insured and may lose value. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein.
