The S&P 500 index surged to a new all-time high on January 3rd when it closed at a record 4,796 points. It was an exciting way to start the new year, but by the end of that week, the index shed 119 points. Volatility increased as investors became more and more concerned about inflation and rising interest rates. The last two weeks of January were among the worst in several years. The lowest closing price in January on the S&P 500 index was 4,326 on the 27th. Based on closing prices only and not the wild intraday swings, this was a loss of nearly 10% off the high.
Breakouts in November Failed
We were happy to see the breakouts to the upside last November in small caps and technology, but they failed to hold. The correction in individual stocks and some market sectors in 2021 reached the broad indexes in January. All the indexes put in lower prices. At the end of January the Nasdaq was down 11% from its November high and small caps were down 17%.
Technical indicators were extremely oversold by January 27th. The next four trading days brought a much needed bounce off the bottom. The S&P 500 regained over half of its January losses by the close on February 2nd. However, on February 3rd new selling drove prices down once more.
Jobs Report Surprises
Mid-day on February 4th, results are mixed as investors evaluate the January jobs report released this morning. The expectation was 125,000 new jobs and some pessimists even expected the number could be negative. Instead, there was a surprise report of 467,000 new jobs in January and a revision of the December numbers to over half a million new jobs. This sounds like good news, but investors are viewing it as confirmation that the economy is heating up and the Fed will press forward on its plan to raise rates next month. Indexes dropped on the news but have fought back to show a slight gain in the hours following the report.
A Bottom or a Short-term Bounce
Is the recent rally indicative of a bottom or is it only a short term bounce with more downside to come? Recovering from a correction, it would not be unusual to retest the January low before resuming an uptrend. Only time will tell us when a bottom is in, so a defensive position is prudent as we wait for more confirmation.
We are not yet seeing a flight to safety which is when investors leave the stock market for bonds and gold. Bonds and gold both struggled in January, too. Instead, energy stocks and consumer staples are benefiting from the decline in technology. Also, after lagging for more than a decade, international stocks are improving. All stocks do not decline in the face of inflation and rising interest rates.
Monetary Policy in Transition
After two years of the Federal Reserve operating in a crisis mode we are in a transition period. Enormous amounts of liquidity have been pumped into the economy. It must end if we are to return to a normal market driven economy. The federal stimulus checks to individuals stopped in September. The Federal Reserve’s bond buying program is being aggressively phased out and it should end in March. The Fed is also planning to reduce its balance sheet this year by selling bonds. Most economists expect the first interest rate hike to come in March, ending the two year zero-interest rate policy. As this process takes shape, the market will need to adjust.
We can expect volatility in 2022, at least until the uncertainty is resolved and the market digests the changes in monetary policy.
Written by Connie C. Guelich, CFP, AEP, CLU, ChFC. This represents our views at the time of this writing, and it is subject to change. It is not intended to be personal investment advice. If you would like to discuss your own account, please don’t hesitate to call us.