Keeping focused on your long-term goals

Weekly Market Commentary | Week ending January 21, 2022

 

Commentary provided by Mark Szycher, Vice President, Investment Specialist, AIG Retirement Services

Market Performance Snapshot* (Week ending January 21, 2022 and Year to Date)

  • Dow Jones Industrial Average®: -4.6% | -5.7%
  • S&P 500® Index: -5.7% | -7.7%
  • NASDAQ Composite® Index: -7.6% | -12.0%
  • Russell 2000® Index: -8.1% | -11.5%
  • 10-year U.S. Treasury note yield: 1.76%
    • Down 3 basis points from 1.79% on January 14, 2022
    • Up 25 basis points from 1.51% on December 31, 2021
  • Best-performing S&P 500 sector this week: Utilities, -0.8%
  • Weakest-performing S&P 500 sector this week: Consumer Discretionary, -8.5%

    *Past performance is no guarantee of future results.

Stocks continue to suffer amid rising yields

Equity markets dropped sharply as rising Treasury yields continued to drive a reassessment of equity valuations. The growth-and-technology-heavy NASDAQ Composite fell into correction territory—defined as a 10% drop from the most recent high. It’s now down 12% this month and more than 14% from its November high. The Dow Jones Industrial Average and S&P 500 also fell. The small-cap Russell 2000 closed at a 52-week low.

  • The 10-year Treasury yield briefly surpassed 1.9%, a level not seen since 2019, while the 2-year yield touched 1.08%, eclipsing 1% for the first time since February 2020. Both rates eased later in the week as geopolitical tensions between Russia and NATO caused some investors to seek safety in bonds. The 10-year yield closed the week at 1.76% while the 2-year closed at 1.02%.
  • Despite slipping this week, energy stocks have bucked the downward trend this month, as forecasts for rising global demand remain intact. Benchmark oil prices have risen more than 12% since the start of the year and the S&P energy sector is the only one in positive territory year-to-date, up 12.8%—adding to its market-leading performance in 2021.
  • This week brought mixed results from bank earnings reports. Goldman Sachs’s quarterly profit declined, while Morgan Stanley’s and Bank of America’s rose. The more consumer-facing Bank of America also reported loan growth and higher interest income. All three banks reported rising compensation costs that gave investors concern about the future trajectory of expenses. The KBW Nasdaq Bank Index lost 10% this week, erasing its 2022 gain.
  • Consumer-goods giant Procter & Gamble raised prices by an average of 3% in the most recent quarter, helping drive a 6% increase in sales revenue. The company expects to continue raising prices in 2022, anticipating that consumers will absorb higher prices and even trade up to premium products. P&G also reported higher costs along the supply chain and raised its forecast for raw material and transportation costs in 2022.
  • Netflix beat estimates for revenue and growth, but weak subscriber growth pushed the stock down more than 20% on Friday. Another high-performing pandemic stock, Peloton, stumbled on reports the company is pausing production of its cycles and treadmills amid weak demand. Peloton stock dropped 24% on Thursday before rebounding 11.7% on Friday.
  • UnitedHealth Group delivered quarterly revenue and earnings growth and said the Omicron variant is producing less severe symptoms and shorter hospital stays than earlier forms of Covid. As with previous Covid spikes, non-Covid healthcare usage has declined in January as people put off discretionary doctor visits.
  • Weekly new jobless claims jumped to 286,000, an increase of 55,000 from the prior week. Omicron may be creating some ripples in the labor market, but overall employment numbers have remained strong. The 4-week moving average of continuing claims is at its lowest level since April 2019.
  • The housing market remains strong. Existing home sales declined 4.6% in December, largely because the supply of available homes was low. Sales for all of 2021 were 8.5% above 2020 and the strongest since 2006. The median home price in December 2021 was 15.8% higher than in December 2020.
  • Homebuilders are trying to ramp up supply. Building permits rose to 1.87 million in December – well above the consensus forecast of 1.71 million – and housing starts reached 1.7 million, also above the consensus of 1.65 million. One question lingering over the housing market: How will dwindling supply, higher offering prices, and rising interest rates (30-year fixed mortgage rates have risen 45 basis points this month) affect sales and prices moving forward?

Fed policy decisions ripple across borders, causing some concern for emerging economies

The Federal Reserve’s policy committee meets January 25-26 and while no interest rate move is expected the trend toward tighter monetary policy in major western economies has driven up bond yields in the U.S. and elsewhere. But policymakers around the globe aren’t moving in lockstep. 

  • The yield on the German 10-year bund climbed back into positive territory for the first time since 2019, before retreating below zero later in the week. The yield had dipped to -0.85% in March 2020.
  • Inflation readings in Canada and the UK reached their highest levels in 30 years. The Bank of Canada meets next week amid speculation of raising interest rates sooner than previously anticipated. The Bank of England began tightening policy in December and many observers expect another rate rise at its February meeting.
  • In response to slower-than-anticipated fourth quarter GDP growth, weaker consumer spending in December, and concerns about possible defaults on property loans, China’s central bank lowered key interest rates, moving in the opposite direction to most western central banks. In a speech to the World Economic Forum, Chinese President Xi Jinping encouraged the Fed and other western central banks not to “slam on the brakes” by raising rates too quickly, potentially jeopardizing the recovery in emerging economies.
  • Economists at the International Monetary Fund recently echoed the sentiment, noting “risks to growth remain elevated by the stubbornly resurgent pandemic. Given the risk that this could coincide with faster Fed tightening, emerging economies should prepare for potential bouts of economic turbulence.”

Final thoughts for investors

Markets in the U.S. and abroad continue to adjust to a higher interest rate environment, leading to volatility as investors try to assess how well different market segments and asset classes could perform. Periods of market adjustment present both risks and opportunities. Speak with a financial professional about staying on track toward your long-term goals.

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