The hulking giant known as the US Federal Reserve is awake and concerned. It is concerned about the inflation caused by the COVID-19 pandemic and its effects on energy prices and global supply chains. US was 7% in December.
So for 2022, investors should definitely pay attention to what the Fed is doing — which for now at least means it will raise interest rates for the first time in two years after the central bank cut its key federal funds rate basically to zero to economy to survive the pandemic.
Savvy investors will continue to monitor the Fed's longer-term movements, as the hike process can have several knock-on effects, although some have already started even before the rate hikes have even started. Many investors seemed confused when Fed Chair Jerome Powell said on January 26 that the first rate hike would likely come in March and that the Fed would continue to take measures until inflation rates fell.
In fact, markets generally really started to focus on accelerating inflation in November 2021, right after a very frothy US jobs report came out. As of November 8, many stock indices peaked, including the , the , and the . The largest cryptocurrency by market cap, reached $68,925 on November 10.
Yet the domestic economy in general appeared to withstand the pandemic tensions. But there were side effects:
Higher consumer prices, especially for food, cars, building materials and other commodities. Plus rising house prices.
prices moving towards $90 a barrel and retail gas prices in some parts of the United States are flirting with $4 a gallon.
A feverish stock market, especially in 2020 and 2021, helped with abnormally low interest rates.
But after a triumphant 2021 for equities, the markets finally took a breather, with all major US indices plummeting in January 2022.
NASDAQ 100 300 minute chart
The and suffered their worst losses in January since 2008. The and suffered their largest monthly losses since February 2009.
However, starting last Friday, January 28, and continuing into this week as the month drew to a close, stocks enjoyed major rallies that reversed January's losses. February started off with another strong rally, followed by solid after-hours gains on Tuesday from (NASDAQ:) and (NASDAQ:) but less impressive results and guidance from (NASDAQ:), (NYSE:) and (NASDAQ:). ]
Alphabet also announced a 20-for-1 stock split. Shares of Google's parent company rose more than 10% in after-hours trading.
Of course, it's too early to know whether these strong results will offset the impact of the Fed's upcoming measures. It may just be that traders are now grabbing stocks that were oversold, such as Rivian Automotive, the maker of EV trucks and SUVs (NASDAQ:).
Shares of the Irvine, California-based automaker rose 15.1% Monday and 5.9% Tuesday. That gain, however, came after a 36.6% decline in January.
These rallies are also fueled by good earnings reports from the largest companies, including (NASDAQ:) and (NASDAQ:) last week.
And maybe Wall Street feels good coming Friday will see decent job growth, but less pressure.
Despite all the downward pressure, January produced some winners:
Energy stocks. Their rise was fueled by higher oil prices (up 15% in January after rising 34% in 2021). It looks like stocks will continue higher in February.
That should also happen if tensions over Ukraine ease. According to Baker Hughes, the US is up 150% from its low of 244 in August 2020 to 610 last week, although that is still a long way from the high of this century of 2031.
Halliburton (NYSE:), Schlumberger (NYSE:) and Occidental Petroleum (NYSE:) were the top S&P 500 stocks in January. Exxon Mobil (NYSE:) was up 24% for the month after gaining 48.5% in 2021. Chevron (NYSE:), up 11.9%, was the best performing stock for the month of January.
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The Energy Select Sector SPDR® Fund (NYSE:) is also up 19% in January and 46% in 2021. Exxon represents approximately 24% of ETF stocks.
While financial stocks were flat in January, the group's performance outperformed just about any other S&P 500 sector. Many analysts believe that when rates are higher, financial institutions win because it gives them more pricing power and better earnings.
Dividend payers. As of September 2021, S&P 500 companies paying dividends outperformed non-dividend payers. In January, payers fell by 2.9%. Non-dividend payers fell 9.5%. According to Howard Silverblatt, a senior index analyst at Standard & Poor's, the 6.58% spread between payers and non-payers was the largest since 2004.
The worst performances of the month were:
Pandemic equities . Stocks that rose in response to the pandemic, such as Moderna (NASDAQ:), which is developing COVID vaccines. Moderna has fallen back in part because so many other companies have developed anti-COVID immunizations. Another loser was streaming video giant Netflix (NASDAQ:), down nearly 30% on fears that customer growth would slow.
Recently quoted shares . Shares of companies that went public in the past two years, especially technology and healthcare companies in 2021, that posted little or no profit. Lately they have been pushed down because they are not profitable at all or not profitable enough. Spotify (NYSE:) fell 16.1% in January, after dropping 25.6% in 2021. Most of the declines in the audio streaming service came in the fall, well before the current controversy the service faces. Zoom Video Communications (NASDAQ:) fell 16.1% in January, after dropping 45% for all of 2021. It went public in 2019.
Small biotech companies . Usually, these companies go public to raise awareness of their research and hopefully attract a partner with deeper pockets who can fund their work. Many are trading at 50% or less of their 52-week highs. It was down 11.9% for the month.
How many walks?
For investors, knowing that hikes are ahead, the key question now is: how quickly will the Fed hike rates this year?
Until recently there was consensus two or three times. Current chatter says that because inflation numbers are lousy, it's four times or more this year. Banking giant Goldman Sachs sees five rate hikes in 2022. Ethan Harris, head of Global Economic Research at Bank of America, thinks it will be seven.
If Harris is right, and assuming each increase is a quarter of a percentage point, the federal fund rate could reach 2% by the end of the year. And the Fed may decide to raise interest rates further in 2023.
The initial rate hikes may not have much effect on spending, home buying and consumer prices. It takes time for the rate hike to work through an economy. Shares could continue to rise, although many analysts see it continuing.
But a series of rate hikes will drive up the cost of mortgages, auto loans, and business inventories such as cars. And if the Fed is too aggressive and exceeds its targets, the result could be economic stress.
Consider what happened in June 2003 as the economy picked up steam as it recovered from the 9/11 terrorist attacks and the dot.com crisis of 2000-2001. The Fed raised the Fed Funds rate from 1% to 5.25% in June 2006.
That would suggest a 30-year mortgage rate of 8%, not to mention higher consumer and business loan rates.
A year later, even as the S&P 500 hit record highs, it became clear that a 5.25% fund rate was stressing Wall Street and Main Street. The rate hikes sparked an explosion in evictions and revealed the shaky financial position of many banks and financial institutions in the United States and abroad.
Result: the worst financial crisis since the Great Depression.
Despite the shaky market action in January, it may be fine to continue buying stocks or equity funds. Big companies with big cash flows will still reward investors. Supply chain problems should abate. It is hoped that global tensions will also ease.
But if you are investing, you should keep an eye on the Fed. Watch the pace of rate increases and stick to disciplined selling points.
