January 2022 Stock Market Commentary

Global equities fell in a rocky first month of the year, as 2022 saw a return of volatility caused by fears over the Fed’s plans to raise interest rates and geopolitical concerns out of Ukraine.

The S&P 500, a benchmark for large cap US stocks, fell -5% in January after seeing its first -10% correction since the COVID selloff of March 2020.

The more economically sensitive Russell 2000 Index, which measures the performance of small- and mid-cap stocks, logged a -10% loss on month.

Overseas equities held up well relatively in January after underperforming US stocks in 2021, with the MSCI ACWI ex-US index falling just -4% in January.

Within fixed income, the Barclays US Aggregate Bond Index fell -2% this month, with yields rising at both the short and long ends of the curve ahead of the Fed’s likely rate hike in March. Gold prices remain rangebound and were roughly flat in January.

Despite what felt like a turbulent month, our data-driven “Three Dials” dashboard suggests that the investment landscape remains broadly unchanged, as each of our dials held steady during January, as summarized below:

1. Market Sentiment and Momentum: (Positive ✔️)

When we noted in our year-end commentary that we were overdue for a double-digit decline on the S&P, we did not expect this to play out within just a few short weeks.

However, after reaching what many technicians saw as oversold levels, equities staged a comeback in the last few days of trading, recovering key moving average support levels to close the month. Our Momentum Dial remains in a Positive position at month-end.

2. Economic Fundamentals: (Positive ✔️)

The advance estimate for Q4 GDP growth in the US came in well above economists’ expectations at a +6.9% annualized rate. While we expect 2022 growth to moderate from the +5.7% full-year number we saw in 2021, all datapoints so far indicate a healthy economic expansion continuing into next year.

Despite handwringing over the Fed and geopolitical unknowns, our Fundamental Dial sits in a Positive position.

3. Valuation: (Negative ❌)

Valuation remains our one cause for concern in this current climate, as equity selloffs continue to be focused in the higher-priced growth sectors of the market. While stocks got cheaper during January, they remain expensive in our view, so our Valuation Dial continues to show a “Negative” reading.

Our Three Dials composite retains a “Cautiously Optimistic” view, as continued strength in the areas of Momentum and Economic Fundamentals are balanced by Valuation concerns. We continue to preach diversification and monitor the data closely, and we will communicate any changes accordingly.

Sources: Morningstar , Treasury.gov, First Trust US Bureau of economic Analysis,Case Shiller Index