In a nutshell...
US Tech stocks lead markets down
The Fed pushes yields higher with further talk of tightening
Political tensions rise in the UK and overseas
What’s moving markets…
It’s been a frantic start to 2022… and the rest of the year may not be too different.
Without quite saying it, Jerome Powell (Chair of the US Federal Reserve) all but confirmed the Fed are ‘behind the curve’ when it comes to monetary policy. In other words, they should have started raising interest rates by now. If it wasn’t already, it now seems all but certain this will begin in March and won’t stop for a while. The market thinks so anyway, with at least 4 hikes now priced in for 2022.
The immediate reaction has been most severely felt by the US big tech names. To put it into context, the Nasdaq was down over 15% at one point last month, while Meta (Facebook’s parent), following its first ever drop in quarterly usage, fell by 26.4% in one day…or in soundbite terms, a $31bn 24hr drop in Mark Zuckerberg’s net worth!
Continued high inflation is a big reason central banks are feeling so much pressure to tighten policy quickly. The US and UK came in at 7% and 5.4% respectively for December. This should be close to peak levels. The rate at which CPI declines (or increases!) this year will be key to the extent and speed that conditions tighten.
The intense focus on central banks seems to have put Omicron firmly on the back burner when it comes to market reactions. The apparent mildness of this variant seems to have validated the ‘living with Covid’ thesis for now.
But as volatile as markets have been so far, UK politics has been worse.
An ever-reducing level of support and respect, combined with an ongoing criminal investigation surrounding lockdown parties and No. 10 resignations means Boris Johnson will likely remain under close scrutiny for the foreseeable future. We’ve seen the impact of politics on markets all too often, so watch this space with interest. That said, the UK market has fared well compared to other Developed Market peers so far this year. The FTSE 100 finally made it back to pre-pandemic levels by breaking through 7,500 points and currently sits at just over 7,600 [08.02.22]. Most other markets reached this feat quite some time ago, but it’s an important marker nonetheless.
Markets are also watching the current situation on the Russia/Ukraine border. While insisting there are no plans to invade, Russia have amassed troops, tanks and artillery within reach of Ukraine. Geopolitics are often hard for markets to absorb and process, as the impact on businesses is not always clear cut. But the answer is usually volatility.
Asset class implications…
The markets’ adjustment to the expected 2022 rate rising cycle has seen yields rise sharply. The impact for bond holders has been painful, with the rate sensitive Gilt market the clearest example, down nearly 4% in January.
The flipside being, as yield climbs, bonds become a more attractive asset class for those invested elsewhere.
Growth stocks suffered badly relative to Value stocks last month. These companies have tended to do well in a low interest rate regime, so it’s unsurprising they’ve fallen further. The big question is whether this is the start of a trend. If so, there’s a lot of outperformance to potentially give back.
Regional variation is also of note in January, with some large differences across equity markets. However, it’s the outperformance of UK Income that really stands out. To return nearly 5% amidst the numerous headlines referencing ‘billions wiped off the stock market’ is quite something. And if January is an indicator for the year ahead, the unloved UK dividend market could be a useful allocation within portfolios.
Asset classes in numbers
Source: FE Analytics, GBP total return (%) to last month end
Comments