Telemus Weekly Market Review January 24th - January 28th, 2022
It comes down to the Fed
The market intensity that has defined the first month of 2022 continued this past week. A 1.2% surge higher in the last half hour of trading on Friday resulted in a positive gain of +0.8% for the S&P 500, its first positive week of the year. Markets remain volatile, with significant intra-day swings occurring throughout the week. Stock indices appear to be finding a base, a welcome sign as a set of buyers has begun to step in and ease the one-sided selling pressure that had been occurring.
This week was defined by some important economic news, namely a meeting of the Federal Reserve Open Market Committee and the release of the initial fourth quarter GDP estimate. On Wednesday the Federal Reserve communicated that they were maintaining their policy, keeping interest rates steady and continuing to wind down their monthly bond buying program. Fed Chair Powell indicated that they are likely to start raising interest rates potentially at their next meeting in March and may begin the process of letting assets roll off their balance sheet as early as this summer. This shift toward a tighter or more hawkish monetary policy has some concerned the Fed may tighten too much and slow the economy. At this point, the Fed is providing more of a construct for its next steps and not establishing a pre-set course for how much and when, which the market would prefer.
This week’s release of fourth quarter GDP offered a surprise, as the economy grew a healthy 6.9%. Nearly two-thirds of this growth, however, came from significant spending on inventories, which aren’t a sustainable driver of growth. The market generally seemed to look through Thursday’s GDP report, as it offered a mixed perspective. To us, strengthening exports were a welcome sign as the U.S. had been continuing to set record trade deficits throughout 2021. On the other hand, consumer spending was not as strong as expected with higher prices resulting in consumers spending more on the same sized basket of goods.
Interest rates continue to climb during the week, with more of the movement occurring among shorter maturities. One and two year Treasuries both saw their yields rise close to 20 basis points, or 0.2%. Yields on longer dated bonds, such as the 10-year Treasury were up slightly. Collectively these moves have led to a flattening of the yield curve.
This past week showed signs that stocks may be finding an equilibrium in prices between buyers and sellers. While we expect more elevated volatility in 2022, we are hopeful a balance in order books will curb volatility from recent levels. Unfortunately, the Federal Reserve will likely have greater influence on short-term sentiment this year given the uncertainty around the pace and magnitude of their future actions. The challenge that the Fed faces is that it doesn’t entirely know the answer to how much and when to tighten. Those decisions can’t be put on autopilot and are going to be predicated on future inflationary data. Hence this is going to be a more volatile year as investors continue to consume data and reprice assets based on expectations for the Fed. This week’s strong GDP report reinforces that the economy remains in a favorable position and can handle a degree of tighter monetary policy.
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Matt joined the Telemus team in 2018. As Chief Investment Officer, he leads the firms the investment process and research effort. Matt has experience as an equity analyst and portfolio manager and has advised corporate pension plans on their manager selection. He’s been quoted in Money Magazine and Barron’s.
