Anticipated interest rate hikes and geopolitical uncertainty reflect the choppy week that US equities experienced from January 25-31.
Federal Reserve Chairman Jerome Powell spoke at the Federal Open Markets Committee’s first press conference of 2022 on Jan. 26, saying the Fed plans to raise rates as early as March.
The Fed has already started to wind down its bond buying program, which has been used to bolster the flow of cash during the COVID-19 pandemic, and plans to halt asset purchases even further in March. This gradual reduction in the Fed’s $9 trillion asset portfolio, along with planned interest rate hikes, is intended to ease fears of prolonged inflation.
“When reporters asked Powell if the Fed would consider raising rates at every meeting, which would mean more than four times this year, he didn’t say they wouldn’t, indicating flexibility. to increase rates much faster (if needed) than everyone expected,” Chris Zaccarelli, CIO of the Independent Advisor Alliance, said. Reuters.
In response to Powell’s statement, yields rose to 1.87% on Wednesday from 1.78% on Tuesday, to settle at 1.78% at Monday’s close.
The stock market gave up initial gains on Wednesday after Powell’s statement, with the S&P 500 closing down 0.1%, the Dow Jones Industrial Average down 0.4% and the Nasdaq Composite Index up less than by 0.1%.
Despite rallying on January 28 and 31 up 6.6%, the tech-heavy Nasdaq ended the month with a loss of around 9%. It was the index’s worst January performance since 2008, when it fell 9.9%. As investors anticipate higher rates, many are looking to avoid tech stocks as they carry high valuations and are tied to growth expectations.
In addition to concerns surrounding Federal Reserve interference, investors are troubled by geopolitical tensions, particularly between Russia and Ukraine, with Russia being a major supplier of many key commodities such as oil, natural gas, aluminum and wheat.
With Russia’s dominance in oil production, investors fear regional disruption could push global oil prices higher. Additionally, concerns about the inability of OPEC and its Russian-led partners to meet production quotas remain widespread as demand for oil rebounds rapidly.
According to the International Energy Agency, the two groups produce together 250,000 barrels per day, only 60% of their promised monthly quantity. These supply constraints are pushing oil prices towards all-time highs, with Brent Crude ending the month at $91.21 a barrel.
Morgan Stanley raised its price forecast for the summer quarter to $100 a barrel of Brent Crude.
Overall, January ended with a disappointing performance from most market sectors, with the exception of energy. Over the next few weeks, investors will likely focus on getting inflationary numbers clear and what tighter monetary policy means for equity valuations.