George Lucas, Raiz Group CEO
The first week of 2022 saw investors ditching shares of fast-growing technology companies in favour of less hyped businesses — a big change from 2021. Last year, the S&P500 Index generated a return of around 27 per cent driven mainly by tech and “pandemic-era” stocks. Things could now be changing.
Remember, there’s more to US equities than tech stocks, which have been the main driver of the US stock market over the last couple of years. While the Nasdaq Composite Index is very heavily weighted to tech stocks, the S&P500 Index is a broader indicator of the US stock market. The Russell 1000 Index is even broader, representing the top 1000 US companies by market capitalization.
Rocky first five days for equities
Turning to the current state of play, the Nasdaq Composite shed 4.5 per cent in the first five trading days of 2022, which is not a good look and something that we don’t see very often in January.
Notably, the recent falls are not just in tech stocks, but also in other “pandemic-era” consumer facing stocks like Oatly [NASDAQ: OTLY] which produces Oat Milk.
Such Pandemic-era stocks, particularly those of fast-growing and lossmaking companies, have been sold off the hardest for a while, but this week the sell-off extended to blue-chip tech names like Apple and Google-owner Alphabet that are among the largest in benchmark US stock indices.
As investors turn away from pandemic-era stocks the shares of banks, oil majors, big industrial groups are finding favour. Also popular are companies whose fates are closely interwoven with the reopening of the US economy, including airlines and mall operators, which have advanced.
This should benefit markets like Australia, for the moment, which is more heavily weighted to mining and banks.
Sell-off stoked by rising US inflation concerns
The sell-off is not about Omicron as the fear of Omicron has eased in markets as countries re-open. Rather, it is about inflation and the effect it could have on interest rates and central bank policy.
We saw, for example, the US 10-year Treasury yield — a crucial benchmark for global assets — jump from just 1.51 per cent at the end of 2021 to a high of 1.8 per cent. US government bond have yields surged the most in 28 months as concerns mount that the US Federal Reserve will need to raise rates more aggressively than was previously expected to tame inflation.
Adding to the picture is the US labour market, with December jobs data released Friday showing the nation’s unemployment rate edged down by 0.3 percentage points to 3.9 percent. This solidifies the expectation for interest rate increases in the US sooner rather than later.
Interestingly, the US Fed’s last meeting showed that policymakers could find reasons to accelerate the pace of rate rises as uncomfortably high inflation forces them to rechart their policy path.
‘January effect’ pronounced among US stocks
What does this all mean for the year ahead? I’m sorry to say it, but there’s an old saying in the markets that “how January goes is how the rest of the year will pan out”. So, if January is down then the market expectation will be for a down year for US stocks in 2022.
Even so, I think the market can potentially go higher in 2022 and I’m looking for about a 10 per cent increase in the SP500. At the moment, equity investors are taking their cue from the bond market and the part of the stock market most susceptible to those moves in rates are the speculative “pandemic-era” stocks, which are still making a loss. Watch this space.
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