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Each of the major U.S. stock indexes retreated to start 2022 and the NASDAQ sustained the biggest blow by far, posting a –4.5% return in its sharpest weekly decline in months. The S&P 500 fell 1.8% and the Dow slipped 0.2%. Over the holidays Hollywood lost an icon when Betty White passed away at 99 years old. I have broken down this week’s news using quotes from perhaps her most famous character, Rose from the Golden Girls.
Prices are going up everywhere. An unexpectedly big increase in the inflation rate across eurozone countries put more pressure on the European Central Bank to consider raising interest rates. Consumer prices rose 5.0% in December compared with the same month a year earlier—the highest on record in the eurozone. The U.S on Wednesday will report December’s increase and likely it will mark the seventh month in a row in which inflation topped 5.0%. Inflation will moderate at some point this year as long iwe can keep the virus from further disrupting the already strained supply chain.
Tech stocks felt like they were in free fall after the release of the minutes from the Fed meeting. Over the course of Tuesday and Wednesday, the NASDAQ dropped 4.6%. 2022’s first bout of market volatility may in fact offer an opportunity to add to growth and technology sectors. This week’s move in markets should seem familiar, because it has happened three times already during the pandemic. Each time yields rise sharply over a short period of time and each time it leads to a a sell-off in the Nasdaq and growth sectors broadly. Using recent history as a guide, the sell-offs are relatively short-lived, with the average duration of the sell-off about 21 days, or three weeks, and the average drop from Nasdaq is about 8.0%. Each time the Nasdaq has rebounded and made a new high.
Keep in mind, as we head toward the latter half of the year, growth expectations may moderate, it is wise to start to look for areas of the market that do well in a slower-growth environment – namely large-cap technology stocks. Thus, adding exposure to growth sectors now, and gradually in the months ahead is prudent. The risk-reward at these price levels seems interesting and even more compelling if the sell-off continues in the days ahead.
This week’s job’s report offered conflicting reads. The headline number seemed to indicate the labor market was cooling as December’s U.S. job growth total was well below most economists’ expectations. However, the other numbers released indicated the labor market remains hot as revisions boosted job figures for the previous two months. In addition, the unemployment rate fell to 3.9% and wages grew at a 4.7% annual rate.
Don’t be fooled into thinking that the low unemployment rate will speed up the Fed’s tightening of monetary policy. While the headline unemployment rate seems to be improving, a deeper dive into numbers reveals 3 reasons the Fed may not be so aggressive in tightening policy.
- Labor force participation is still below the pre pandemic level and the Fed may want to see that rate pick up.
- Looking closer at the unemployment rate the recovery has not been broad and inclusive because African American and Hispanic unemployment remains elevated.
- Omicron is not reflected in the numbers, and we don’t know how ongoing uncertainty around the virus will impact the labor market.
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