January 2022 - Market Update

Key Observations

January was a bit of a roller coaster for stocks as broad equity indices declined roughly 10% in the first few weeks of the year. Since then, markets have recovered about half of the decline. This type of volatility is a normal and frequent event in the stock market, although it never feels good to see your accounts decline from their highest point. It is worth a reminder that the stock market has experienced a 10% decline about once per year historically, and a 5% decline about three times per year. January’s performance is certainly not unusual!

The Federal Reserve has telegraphed their plan to start raising rates very soon. The bond market is pricing in 3 rate hikes (0.25% per hike) in 2022, starting at the March meeting. Stocks are digesting this reality, although there could be more volatility around those meetings depending on the language used in the Fed’s official statements.

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Data Dashboard

*Data Source: Bloomberg. As of 1/31/2022*

Stock Market

The decline in January was led by Consumer Discretionary, which was pulled down by weak December retail sales likely driven by earlier than usual holiday shopping and continued supply chain issues. Other sectors that saw large drawdowns were technology and healthcare. Companies such as NVIDIA, AMD, and Moderna experienced significant declines as investors rotated out of producers of technology components and highly valued healthcare stocks into “safer” investments. On the other hand, Energy continued its trend from 2021 as the sector leader, driven by higher crude oil prices.

Investing in foreign stocks has two parts; the returns in their local currency (owning a French company in Euro), and the effect of the conversion back to US Dollars for a US investor. In a period of stable currency, the returns of owning non-US investments are relatively unaffected. But as the US dollar has been getting stronger, the returns on foreign stocks are reduced by the effect of the currency. For example, the MSCI Europe ETF (Ticker: IEV) was up 25% in 2021 when looking at it in Euro, but because of the increase in the US Dollar relative to the Euro, that return if you owned it in the US was only 16%. In other years, the effect has been the opposite. So far in 2022, currency changes have not helped foreign holdings.

Year to Date Returns (by US Sector)

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Bond Market

US Treasury bond yields are up across the yield curve since the end of the year. The increase in yields at a time when stock prices fell was a double-whammy for investors with moderately risky portfolios because their stocks AND bonds declined in value at the same time. The relationship between stocks and treasury bonds are typically low or negative, but sometimes they move together in short periods of time. Using bonds as a risk reducer is still a valuable tool, but it is important to know that the relationships between different asset classes are not constant.

TIPS (Treasury Inflation Protected Securities) have been a great hedge to the rising inflation in the economy, outperforming other bond sectors, especially other US Treasuries. Bonds with exposure to credit felt the effects of both the increase in interest rates and the decline in stock prices, but the extra yield is compensation for that risk. We see benefit in remaining hedged to inflation, given the potentially underpriced inflation in the TIPS markets over the next two years.

Economics

The latest inflation print of 7% headline and 5.5% core (ex-food and energy) was the highest of this market cycle. The Core inflation read matched the previous high in 1990, and the last time we saw headline CPI at 7% was in 1981! Meanwhile, GDP also came in above expectation (also at 5.5%) and the labor market remains fairly tight.

Inflation is not just a US phenomenon. Global inflation in 2021 was 5.4%. Central Banks across the globe have joined the US in adding to their money supply via accommodative monetary policy and direct security purchases. The world will have to deal with the inflation problem in the coming years, and we should expect interest rates to increase globally, just as they will in the US.

Tactical Updates

For our Tactical Portfolios, we increased foreign holdings to include Taiwan in addition to our India exposures. We are still invested primarily in US domestic equities with positions in Financials and Banking, Gold, and Consumer Staples. Throughout January, we cut losses in Consumer Discretionary, Cybersecurity, and Semiconductors, but locked in profits for Technology, Energy, and Real Estate. We realized gains in Financials and re-entered at a more favorable position.

As for Fixed Income, we continue to invest in Treasury Inflation Protected Securities (TIPS) and in high yield corporate bonds with exposure to credit risk. We recently shifted exposure to include floating rate corporate debt and bank loans.

General Client Considerations

The beginning of each calendar year is an ideal time to get your financial ducks in a row and consider your savings goals for the year. We recommend clients take some time during January and February to review 401k and IRA contributions for the year, automatic deposits into investment accounts and plan for any large 2022 inflows and outflows. Please give us a call and let us know how we can help.

Important retirement account updates for 2022

Annual contribution limits have increased to $20,500 in 2022 (up from $19,500) for employees who participate in 401(k), 403(b), most 457s and the federal government's Thrift Savings Plan. If you were born in 1972, in addition to celebrating a big birthday this year, you now also qualify to take advantage of 50+ catchup contributions! The annual catchup contribution limit for those 50+ years of age, you can contribute $6,500 above the $20,500 limit in 2022 - you do not need to wait until your actual 50th birthday to start the catchup.

Note: The catch-up contribution limit for employees aged 50 and over who participate in SIMPLE plans remains unchanged at $3,000.

See below table for updated limits:

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Ryan Wheeler

Chief Investment Officer