S&P 500 woes continue amid uncertain outlook - Raiz Invest

24-01-2022

George Lucas, Raiz Group CEO

Right now, all market news is focused on the US and its main indexes, with the S&P 500 down by around 6 percent year-to-date and the NASDAQ Composite about 10 percent lower, roughly 12 percent off its mid-November high, surpassing the popular definition of a “correction”.

Among notable moves this week was Netflix shares tumbling 21.8 percent, which also weighed on the S&P 500 and the Nasdaq, after the streamer forecast weak growth in subscriber numbers.

With worries about the impact of the Omicron variant fading, I believe the fall in equities may be linked to investors reassessing the prospects for those companies that saw demand boom over the pandemic, as customers become more time poor and they transition from a WFH environment.

Another key trigger, in my view, has been the sharp rise in bond yields, with benchmark US Treasury yields recently jumping to two-year highs.

Looking ahead, there will likely be further big falls in US equities, leading global equities down further. March is a time of tighter liquidity where seasonally we often see equity market sell-offs.

However, I still doubt the S&P 500 will have an awful year, even though the current rotation away from tech and growth stocks will continue.

Remember, the decline in US equities from their highs has reversed only a fraction of the strong gains over the course of the pandemic. Putting it in perspective, the S&P 500 remains about 40 percent above its end-2019 level, while the NASDAQ Composite is still around 60 percent higher.

 

Inflation concerns persist in US

Still in the US, inflation remains very high compared to the past decade, with US Federal Reserve chair Jay Powell calling it a “severe threat” to economic expansion and labour market recovery.

In response, the Fed is on course to steadily remove the ultra-accommodative monetary policy that was put in place to assist the economy during the pandemic. Indeed, this week it is reportedly set to confirm plans to hike interest rates in March for the first time since the start of the pandemic.

In Australia, we can also expect a rate hike in earlier rather than later. Australia’s jobless rate has fallen to 4.2 percent, the lowest rate since 2008, and the RBA is likely to end its asset purchases in February. Wage growth will reach the RBA’s threshold rate of 3.0 percent by the end of the year.

 

Bank Indonesia hints at normalising policy

In Asia, Indonesia’s central bank gave the first signs this week that it will begin normalising policy, even though it left its benchmark interest rate unchanged.

Despite this, the bank revealed that it will start raising its reserve requirement ratio, hiking it to 5 percent in March with more increases to come after that.

This will affect how much money banks can lend, and the liquidity in the Indonesian market. The aim of this move is to defend the Indonesian rupiah and economy as the world prepares for the US Fed to lift rates. China just asked the US and the West politely not to raise rates, which I think they may ignore.

 


 

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