It used to be a general rule on Wall Street that January set the tone for the year. As it stands, this month is the worst month since March 2020, when the pandemic hit the market and stocks plummeted.
Last week was also the fourth-worst January for stocks since at least 1928, according to the S&P Dow Jones Indices. The market is down just under 7% this month.
The S&P 500 was up 0.5% in early trading and the Nasdaq composite was up 1.4% on Monday, the final day of a volatile month for trading. After wild swings last week, stocks recovered some of their losses in Friday’s late rally, although recent trends have been mostly to the downside.
Investors have been worried about inflation, especially the Federal Reserve’s attempt to combat it by raising interest rates. If the Fed isn’t doing enough, higher inflation could erode the wages that workers ultimately earn. Too much, and the economy could stall as workers return from the pandemic.
Last week, Jerome H. Powell, Fed Chairman, confirmed plans to raise rates “soon,” possibly starting in March. However, he did offer some details on how high interest rates would need to be or what the Fed could do with the trillions of bonds it has bought to lift the economy over the past two years.
Understanding inflation in the US
“The Fed really changed its stance last month,” said Kathy Bostjancic, US financial economist at Oxford Economics. “People have been told that inflation is temporary, and now they worry that it’s not and it’s going to be more persistent.”
This leaves investors feeling nervous about the market, which has had a rough start to the year. That suggests the link between January trading and the rest of the year has been weaker recently. The January market drop was quite common, even in the previous two years, which resulted in large year-over-year gains.
Many Wall Street strategists are predicting that the market will end 2022 higher. For example, David Kostin, US equity strategist at Goldman Sachs, predicts that the market will be up 15% year-end from Friday’s close. UBS’s top equity strategist, Mark Haefele, said in a note to clients on Thursday that he is also sticking to his year-end goal: up 15% from Friday’s close. “We expect the stock rally to continue,” Haefele wrote in his note.
The market looks volatile, but its recent swings have been only slightly larger than usual. Howard Silverblatt, senior analyst at S&P Dow Jones Indices. So far this year, that number is 1.8 percent, about the same as in 2020, but far below the 3 percent average in 2008, during the height of the financial crisis.
Ordinary investors are not yet scared. Bank of America wrote in a research note last week that its retail clients, as a group, put more money into the stock market than they pull out. In the first three weeks of the year, individuals with a Bank of America account bought $2.3 billion more stock than they sold.
Frequently asked questions about inflation
What is inflation? Inflation is a Loss of purchasing power over time, which means your dollar won’t go as far tomorrow as it did today. It is usually expressed as an annual change in prices for everyday goods and services such as food, furniture, clothing, transportation, and toys.
At the same time, however, hedge funds that use Bank of America to trade have sold nearly $3 billion more in stock and bond funds than they bought. “Retail customers are still the biggest buyers (usually in January),” Jill Carey Hall, a strategist at Bank of America, wrote in the note. “Customer purchased the immersion.”
One thing that adds to the optimism is that the company’s profits continue to soar. Analysts believe fourth-quarter profits for companies in the S&P 500 rose 24% year-over-year, according to market data services FactSet. Earnings are expected to slow this year, but are still up 9% in the first three months of the year.
Strong earnings from Apple supported the market last week, easing concerns that the tech industry’s era of rapid growth may be coming to an end. Amazon and Alphabet, the parent company of Google, will release their reports for the final three months ending December this week.
Another good sign: Sectors like financial and industrial stocks that are closely tied to the economy have outperformed the market as a whole. Shares of General Electric, for example, are down only about 2.5% since the start of the year. Wells Fargo’s stock price is up 2.5% in 2022.
“I don’t think there’s too much of a risk for a recession right now,” said James Paulsen, strategist at Leuthold Group. “Then I don’t think it’s a bull.”
https://www.nytimes.com/2022/01/31/business/dealbook/stock-market-wall-street.html Bad January for stocks, but Wall Street expects a better year