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2020 Financial Markets Update

Week in Review: January 28, 2022

January 31, 2022

Recap & Commentary

Markets ended a volatile week on a positive note with the S&P 500 gaining 2.4% on Friday, which was enough to produce a positive weekly gain, though one would be forgiven if they doubted that fact. Volatility dominated the week with the S&P falling by 0.8% or more at some point during each trading session. That included Monday, when the S&P fell 4%, before sharply reversing to end up 0.3%. According to Barron’s, since 1978 there have only been three days where the S&P was down by a larger percentage only to end the day higher. The reversal also prevented the S&P from suffering its first official correction since March 2020. The heightened volatility was largely attributable to ongoing concerns about Ukraine in addition to inflation and uncertainties surrounding monetary policy, both in the run up to the Federal Reserve’s meeting and even afterwards.

On Wednesday, the Fed announced that it will now end its bond tapering in early March, and all but confirmed that it will begin to raise rates the same month.  Speaking afterwards, Federal Chair Jay Powell reiterated that the Fed will be as responsive as necessary in combating inflation, utilizing both interest rate hikes as well as reductions to its balance sheet. Powell also surprised markets by not explicitly ruling out the possibility of enacting a 0.50% rate hike at some point, as opposed to the 0.25% increases the market is currently expecting.

Similar to equity markets, interest rates also experienced meaningful intra-week volatility in which the 10-Year Treasury yield ranged from 1.71% to 1.88%, before ending the week at 1.77% up just 0.01% from where it started.

Economic Commentary

Fourth quarter Gross domestic product (GDP) surprised to the upside, increasing 6.9%, well ahead of the 5.5% consensus estimate, and up sharply from 3Q21 growth of 2.3%.  Inventory restocking was the most significant contributor, accounting for 4.9% of the total growth. Consumer and business spending increased from 2.0% to 3.3%, and 12.4% to 32.0%, respectively. Excluding inventories, business spending rose 1.3% Trade was neutral for the quarter, ending five consecutive quarters in which it detracted from growth. Overall, the 4Q21 report was very positive and helped push full year growth to 5.7%, the strongest pace since 1984.

Measures of consumer confidence and sentiment both fell, with the latter hitting its lowest level in just over a decade. Not surprisingly, inflation remains a primary concern, with 5-year inflation expectations rising 0.2% to 3.1%.

Consumer spending fell 0.6% in December, reflecting concerns about Omicron and inflation, and consumers pulling holiday spending into November to avoid supply chain issues.

New home sales jumped 12% in December to an annualized pace of 811K, the highest level since March.  Notably, the median price fell to $377.7K, its lowest level since June, but still 4% higher from a year ago.

Durable goods orders slipped in December with the headline number declining nearly 1%. Core business order were flat after rising 0.3% in November.

Of Note

Through Friday, 33% of S&P 500 companies had reported 4Q21 earnings, with 77% of those surpassing their consensus estimate. According to industry group Factset, aggregate 4Q21 S&P 500 earnings are expected to increase 24%, year over year.

S&P 5000.8%
Small Caps-1.0%
Intl. Developed-3.6%
Intl. Emerging-4.3%
U.S. Bond Market-0.4%
10-Year Treas. Yield1.77%
US Dollar1.7%
WTI Oil ($/bl)$87
Gold ($/oz)$1,792

The Week Ahead

  • Jan. Employment Report
  • ISM Manufacturing
  • ISM Services
  • Weekly Jobless Claims

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