Sabco® Investment's Monthly Market Report - January, 2022

Sabco® Investment's Monthly Market Report - January, 2022

In January, equity markets were overshadowed by concerns of a more rapid and aggressive tightening of monetary policy in the United States, impacting regions worldwide.

The U.S. market experienced a decline of 5.6% in euro terms during January. Other regions fared relatively better: European stock markets saw a 3.6% decrease, while emerging market equities fell by 1.3%. Notably, the energy sector in the United States remained positive since the beginning of the year. In Europe, financials, communication services, and real estate performed well. However, technology stocks underperformed, with the NASDAQ experiencing a 7.6% decline in euro terms. The S&P 500 index faced its most significant monthly drop since March 2020. Value stocks outperformed growth stocks during this period, and major U.S. tech companies, including Amazon (-10.3%), Microsoft (-7.5%), Meta Platform (-6.9%), Tesla (-11.4%), and Netflix (-29.1%), suffered notable declines.

The shift in U.S. monetary policy, coupled with the rapid increase in bond yields, amplified concerns surrounding the valuation of risky segments in the market. While monetary policy garnered significant attention, the unwinding of supportive fiscal policies also raised concerns. The slowdown in high-frequency indicators, partly influenced by Omicron, further dampened sentiment. Additionally, geopolitical tensions remained high, negatively impacting investor sentiment throughout the month.

Despite strong corporate earnings results, relief was elusive in January. The profits of the S&P 500 index indicated a fourth consecutive quarter of growth, surpassing 20% in Q4, and various sectors continued to demonstrate robust demand. However, persistent supply chain pressures and rising component prices remained in the spotlight. Wage pressures garnered increased attention, and several companies, including prominent banks, faced scrutiny for reporting higher expenses. The deceleration in earnings revisions further weighed on stock markets.

Bond markets also experienced negative performance during the month. U.S. and German 10-year yields rose by 0.28% and 0.14%, respectively. Spreads of southern eurozone countries remained relatively stable. Corporate bonds (-1.2%) slightly underperformed Eurozone government bonds (-1%). In the United States, the performance gap was more significant, with corporate bonds experiencing a decline of 3.7% in January compared to a -2% performance for U.S. government bonds. The rise in risk-free rates was primarily driven by the Federal Reserve's shift in policy focus towards combating inflation. However, long-term interest rates showed signs of stabilization towards the end of the month.

The change in tone from the Federal Reserve was the primary catalyst behind declining investor risk appetite throughout January. The minutes of the December Fed meeting, released at the beginning of the month, revealed discussions among Fed members regarding reducing the central bank's balance sheet size. This reduction was expected to commence relatively early after the first interest rate hike, potentially earlier than during the final phase of asset reduction in the previous cycle. As anticipated, the January Fed meeting paved the way for the first interest rate hike in March. Furthermore, comments from Fed Chairman Powell were perceived as less accommodative. By the end of the month, the market was anticipating five 0.25% interest rate hikes throughout the year. The European Central Bank did not convene in January, with the next monetary meeting scheduled for February 3.

Revised market expectations regarding future interest rate hikes supported the dollar, leading to a 2% appreciation against the euro in January. The Brazilian real saw a nearly 5% increase against the euro during the month, as Brazil's central bank indicated that inflation would surpass the 2022 target. The bank confirmed that an aggressive cycle of interest rate hikes would help contain the increase in the cost of living below 5%. They announced an expected third consecutive 1.50% increase in the policy rate in February. Since March 2021, the central bank has raised the policy rate from 7.25% to 9.25%.

In January, the price of oil rose by 17.3%. Oil prices closed the month at levels approaching the highest seen in the past seven years, marking the sixth consecutive week of increase. The price surge was driven by geopolitical risks and concerns regarding sluggish production growth. Gold experienced a slight decline of 2.1% in dollar terms, while industrial metals rose by 2.5%.