January marked a volatile month of trading for U.S. stocks, as investors in risk assets considered the implications of the Federal Reserve's signals to unleash more aggressive policies to help bring down soaring inflation.

With prospects of higher interest rates and tighter financial conditions looming, stocks have traded choppily over the past month. This has especially been the case for technology companies valued heavily on expected future earnings, which would be pressured by higher rates. The Nasdaq Composite shed about 9% in January. The S&P 500 dropped more than 5% in its worst month since March 2020. On a sector basis, the consumer discretionary, real estate and information technology sectors underperformed, while the energy sector soared by 19% in January to far outperform the broader market. The Dow declined by more than 3%. 

The bond market was under pressure as well.  Investment grade corporate bonds were down over 3% in January, notching it’s fifth-worst monthly performance on record.

Worse months from a total return perspective were March 2020, when credit markets lurched in the early part of the pandemic, two months in the 2008 global financial crisis, and in July 2003, according to CreditSights.

It’s interesting to note that each of those months — except for September 2008 (Lehman’s collapse) were followed by monthly upswings in performance (see chart).

As we continue to speak about in our monthly updates inflationary concerns which the Federal Reserve has consistently labeled as “transitory” are now entrenched within our economy.  Fed Chair Jerome Powell extremely hawkish post-FOMC press conference was telling as the chairman admitted the committee was behind the curve and will need to catch up with potentially aggressive rate hikes.  

Rate hike have been priced into the market for some time.  For example, at the close of business in December the market was looking for the Federal Reserve to hike overnight rates by about 75 basis points by year end 2022.  In January, the market priced in an additional 50 basis points of rate hikes for the calendar year 2022.  It's now expected the Federal Reserve will raise rates at 5 of the 7 meetings this year starting in March. Some economists are looking for a more aggressive Federal Reserve move pricing in seven 25 basis points hikes.

It is important to note bond price are inversely correlated with interest rates.  As bond yield go higher, fixed rate bonds prices go lower.  Longer term bond prices reflect the markets estimate of future short- term rates.  As an example, we just mentioned the market priced in 2 added 25 basis point moves in for 2022.  US Government 2 year note yield went from .73% at the close of business in December to 1.18% in January.

As we mentioned in our late January update, it is important to keep in mind market corrections are entirely common during bull markets and are even healthy. 

Since the update on January 25th, markets have rebounded substantially of their lows.  As an example, the Nasdaq 100 is now up over 9% from its lows and the S&P has risen over 7% off its lows.

As in our previous communications, we continuously speak to increased market volatility in both stock and bond markets.  Our job is to ensure proper asset class balance ensuring portfolio diversification.

As always if you have any questions feel free to reach out.

Best,
Bob

This material is intended for general public use and is for educational purposes only. By providing this content, Park Avenue Securities LLC is not undertaking to provide any recommendations or investment advice regarding any specific account type, service, investment strategy or product to any specific individual or situation, or to otherwise act in any fiduciary or other capacity. Please contact a financial professional for guidance and information that is specific to your individual situation. Russell 2000 Index measures the performance of the smallest 2,000 companies in the Russell 3000 Index of the 3,000 largest U.S. companies in terms of market capitalization. The Hang Seng Index is a free float-adjusted market-capitalization-weighted stock-market index in Hong Kong. S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large-cap segment of the U.S. equities market. NASDAQ Composite Index is a market value-weighted index that measures all NASDAQ domestic and non-U.S. based common stocks listed on the NASDAQ stock market. Each company's security affects the index in proportion to its market value. Indices are unmanaged, and one cannot invest directly in an index. Past performance is not a guarantee of future results. All investments contain risk and may lose value. Investing in the bond market is subject to certain risks including market, interest rate, issuer, credit and inflation risk. Equities may decline in value due to both real and perceived general market, economic and industry conditions Opinions expressed are those of the author and not necessarily those of Guardian or PAS. 2022-132646 Exp 01/23

Sources Bloomberg, FactSet and CNBC.