MARKET UPDATES

The stock market was off to a rough start in 2022, as concerns over inflation and anticipated moves by the Federal Reserve (Fed) drove the S&P 500® down by about 13% through the opening weeks of the year. While strong corporate earnings helped steady the market and regain some of the lost ground in the final week of January, the volatility continued in early February.

After a strong 4^th quarter for the economy, real gross domestic product (GDP) growth was estimated at 5.7% for 2021, according to the U.S. Department of Commerce in its January 27 release. The report attributed the acceleration in GDP growth in the 4^th quarter – estimated at an annualized rate of 6.9% – to “an upturn in exports and accelerations in private inventory investment and personal consumption expenditures (PCE).”

Disposable personal income increased by 0.3% in the 4^th quarter, although real disposable personal income declined by 5.8% during the quarter, due in part to the impact of inflation. The PCE price index, which is one measure of inflation, increased by 5.5% in 2021.

During its January meeting, the Fed Board maintained the federal funds rate at zero to 0.25%, but a new round of rate hikes is expected to begin as early as March. According to a statement issued by the Fed at the end of January, “with inflation well above 2% and a strong labor market, the committee expects it will soon be appropriate to raise the target range for the federal funds rate.” The Fed is expected to raise rates in increments of 0.25% at least twice during 2022 to help dampen inflation. The Fed has also signaled that it expects to start drawing down its $9 trillion balance sheet later this year shortly after its first rate hike.

Oil prices continued to climb amid rising global demand and increasing geopolitical tensions over the Ukrainian crisis. West Texas Intermediate, a grade of crude oil used as a benchmark in oil pricing, surged 17.21% in January.

Drilling down

U.S. stocks sink

The S&P 500 Index plunged 5.26% in January (with a total return, including dividends, of -5.17%), from 4,766.18 at the end of December to 4,515.55 at the January close. (The S&P 500 is a market-cap-weighted index that represents the average performance of a group of 500 large capitalization stocks.)

The NASDAQ Index fared even worse, down 8.98% for the month, from 15,644.97 at the close of December to 14,239.88 at the end of January. (The NASDAQ – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.)

Retail sales slip

Retail sales declined 1.9% for the month in December, stunted by supply shortages and rising consumer prices, according to the January 14 Department of Commerce retail sales report. However, sales rose 16.9% year-over-year from December 2020 through December 2021, as businesses continued to rebound from the pandemic slowdown.

Building material sales were up 0.9% for the month of December and 12.5% year-over-year from December 2020, while department store sales were down 7.0% for the month but up 22.5% from a year earlier; auto sales were down 0.7% for the month but up 9.6% from a year earlier; and non-store retailers (primarily online) were down 8.7% for the month but up 10.7% from a year earlier.

With consumers returning to restaurants and bars, sales at food services and drinking establishments were up 41.3% from a year earlier, although, with the Omicron variant surging, sales were down 0.8% for the month.

Employment gains dwarf expectations

Economists had expected a relatively low count of new jobs in January due to the impact of the Omicron variant, but instead, the U.S. added nearly half a million new jobs for the month.

According to the Employment Situation Report issued February 4 by the Department of Labor (DOL), the economy added 467,000 new jobs in January. Despite the gains, the unemployment rate ticked up 0.1% to 4.0%. Employment growth was particularly strong in several industries, including leisure and hospitality, professional and business service, retail trade, and transportation and warehousing.

Average hourly earnings for all employees on private nonfarm payrolls rose by $0.23 to $31.63 in December.

Energy booms while most sectors suffer

The Energy sector of the S&P 500 jumped 19.10% in January to lead all sectors. The only other sector in positive territory was Financials, up just 0.06%. Biggest losers for the month were Consumer Discretionary, down 9.68%, Real Estate, down 8.50%, Information Technology, down 6.89%, and Materials, down 6.84%.

The chart below shows the results of the 11 sectors for the past month:

Treasury yields rise

With inflation heating up and the Fed expected to begin raising rates, bond yields moved up 0.27% in January, with the yield on 10-year U.S. Treasuries rising from 1.51% at the end of December to 1.78% at the January close.

Oil prices surge

Rising global demand and geopolitical concerns over the crisis in Ukraine drove oil prices significantly higher in January, with the price of West Texas Intermediate surging 17.21% for the month, from $75.21 per barrel at the end of January to $88.15 at the January close.

Gasoline prices also edged up 0.77% in January, with the average price per gallon rising from $3.38 at the end of December to $3.42 at the end of January.

International equities stumble

International equities moved in sync with falling U.S. stocks in January, with the MSCI EAFE Index dropping 4.86% for the month, from 2,336.07 at the end of December to 2,222.45 at the January close. (The MSCI EAFE Index tracks developed-economy stocks in Europe, Asia, and Australia.)