Volatility Rises Amid a Shifting Investment Landscape

The year-to-date selloff in equities accelerated last week, piercing significant technical milestones in the process. The S&P 500® index shed 5.7 percent, its worst weekly decline since March, 2020. In the process, the index fell through both its 100- and 200-day moving averages. The index is now lower on the year by 7.7 percent, and down 8.3 percent from its January 3 closing high. The VIX index surged higher from 19 to 28. The declines were even worse for the Nasdaq Composite, which fell 7.6 percent for the week, leaving it lower by 12.0 percent on the year, and down 14.3 percent from its November 19 high.

Rates and Earnings in Focus this Week

It turns out that December wasn’t a very good month for the U.S. economy. The combination of the Omicron variant and higher inflation conspired to keep activity subdued. Retail sales suffered a far larger decline than anticipated, dropping 1.9 percent. And industrial production also fell unexpectedly. These reports followed earlier signs of slowing contained in the ISM PMIs and payroll employment, although the unemployment rate continued to fall. The Atlanta Fed’s GDPNow model lowered its fourth quarter growth model last week all the way to 5.0 percent from 6.7 percent in response to the weakness. Consumer prices also surged higher by 7.0 percent in December, the highest level since 1982.

Stocks Look to Regroup Following A Shaky Start to the New Year

The ongoing bond market adjustment to the threat of tighter monetary policy accelerated last week, as yields jumped at the start of trading in the new year. The expectation of higher rates was reinforced during the week, first by the minutes of the Fed’s December meeting, followed by the solid December jobs report. The yield on the U.S. ten-year note surged 25 basis points higher on the week to 1.76 percent, its highest in two years, dating back to just prior to the onset of the pandemic. The bond market adjustment began in September when the Fed first hinted at tapering. Back then the ten-year note was yielding 1.30 percent. The more Fed sensitive two-year note has climbed from 0.20 to 0.86 percent since September, after rising 14 basis points last week. For the week, the Bloomberg Barclays U.S. Aggregate Bond index fell 1.5 percent. 

Markets in 2022: Moving from Extraordinary to Ordinary

Stocks ended the year in a show of strength, establishing a new record weekly close, one day after setting a record daily close. Last week, the S&P 500® index rose 0.9 percent, and for the month of December rose 4.4 percent. For the full year, the S&P 500® index surged higher by 26.9 percent. But it may be worth noting that the strongest groups recently have mostly defensive sectors, as investors weigh concerns related to the pandemic, evolving monetary policy, and an aging bull market. The leaders last week were Real Estate, Materials, and Utilities. Only Communication Services was lower, but Technology, Consumer Discretionary, and Financials all underperformed. For the month, Consumer Staples, Real Estate, and Utilities led the way. No sectors were lower, although in a statistical anomaly, the Consumer Discretionary ETF XLY was exactly unchanged. But other underperformers included Energy, Financials, and Tech. For the full-year, energy stocks led the way higher with a gain of 46 percent, followed closely by the 42 percent gain in Real Estate. The underperformers were led by 14 percent gains in Utilities and Consumer Staples.