Financial Market Roundup
Produced by Fifth Third's Investment Management Group
In the following piece, Fifth Third's Investment Management Group recaps the market and how it reacted to various events in the month of January.
The COVID-19 pandemic has continued to have a major impact on life across the globe, and therefore economic activity, employment, and corporate earnings. Governments around the world are mixed on COVID-19 related guidelines as global daily cases appear to be rolling over from mid-to-late January peaks. While the threat of COVID-19 variants continues, particularly with the discovery of omicron, vaccines and booster shots appear to provide a level of protection that mitigates the most severe economic risks. Nearly sixty-four percent of the total U.S. population was fully vaccinated as of the end of January, while 42% of those fully vaccinated have gotten their booster shot. Lingering COVID-19 economic restrictions, supply chain bottlenecks, vaccine distribution and administration data, government fiscal stimulus measures, central bank policy actions, geopolitical tensions, and inflation measures are topics that the Investment Management Group is monitoring.
Major global central banks continued to support the global economy by maintaining low interest rates and implementing programs to increase market liquidity, though some major central banks are beginning to gradually remove accommodation in response to inflationary pressures. At its January meeting, Federal Reserve officials maintained the pace of tapering asset purchases, putting the Federal Reserve on track to conclude the program in March. The faster pace puts the Fed in a position to raise rates in March. The market is now pricing in five rate hikes in 2022, up from three in December. Fed Chair Jerome Powell anticipates price pressures to subside over the next year but understands policy will need to be nimble based on the environment. The European Central Bank (ECB) remains committed to supporting the region’s economy and is expected to leave policy unchanged at its early February meeting. The Bank of Japan (BOJ) also maintained monetary policy settings at its latest meeting but noted that inflation expectations had risen modestly.
Global equities slid in January as investors navigated through a volatile month of trading. The S&P 500 Index fell 5.2% for the month, the largest monthly decline for the benchmark index since March 2020. The blue-chip Dow Jones Industrial Average slid 3.2% in January, while the tech heavy NASDAQ Composite dropped 9.0% last month. International stocks also declined, with the MSCI All Country World Index of developing and developed market stocks falling 4.9% in total return in January. Emerging market stocks outperformed international developed stocks for the month. The MSCI Emerging Markets Index slid only 1.9% in January and the MSCI EAFE Index of developed international equities fell 4.8% for the month.
Intermediate-term yields rose in January amid rising geopolitical threats and a more hawkish Federal Reserve. The 10-year U.S. Treasury yield rose 27 basis points in January to end the month at 1.78%, roughly 34 basis points higher than the start of December. The U.S. economy expanded at a 6.9% annualized rate in the fourth quarter, according to data from the Bureau of Economic Analysis. Personal consumption, the largest contribution to GDP, increased at an annualized rate of 3.3%, an acceleration from the third quarter. Economists currently expect growth to progress as the U.S. economy continues to reopen, though perhaps at a slower rate than previously expected given developments in COVID-19.
Little progress has been made on the U.S. political front amid swirling tensions between Russia and Ukraine. The Build Back Better plan, once hoped to be passed before Christmas, now sits in limbo as geopolitical tensions have taken priority. President Biden is still hopeful that he will be able to get parts of the plan to pass. The short-term government funding bill to prevent a government shutdown is funded through February 18, forcing Congressional leaders to devise a plan of action in the upcoming weeks. The House of Representatives also passed a $2.2 trillion social spending plan in November, which continues to be negotiated in the Senate. The bill passed in the House includes a 5% surtax on modified adjusted gross income in excess of $10 million and an additional 3% surtax on modified adjusted gross income in excess of $25 million. Notably absent from the latest version of the legislation is any change to the capital gain tax rate, the gift and estate tax exemption amount, or the grantor trust rules.
Inflation concerns continued to dominate investment themes in January amid geopolitical risks, supply chain and labor market bottlenecks, with market participants debating whether inflationary factors will persist. COVID-19 concerns remained elevated but much of the focus remains on the shift to more hawkish Fed policy driven by persistent inflation. Vaccine distribution continues in the United States with booster shots recommended for all adults and central banks and governments continue to offer monetary and fiscal stimulus; the combination of which has lowered overall economic and financial market uncertainty. While markets are feeding off massive fiscal stimulus and indicators of improving economic data, some areas of the economy, particularly industries with supply chain worries and those significantly impacted by COVID-19 cases rising, remained depressed in January. Despite lingering COVID-19 disruptions and inflation concerns, the tailwinds of government stimulus, central bank liquidity, vaccine implementation, excess capacity, and pent-up demand, global economic growth is likely to continue in 2022.