Watch the CPK Market Action Report: February 2022
Stocks start off the year with a dismal performance for the month of January. With inflation at a fresh all-time high since 1982, will markets be able to handle the Federal Reserve’s tightening of their monetary policy to get inflation back under control or will investors suffer even more collateral damage in their portfolios.
Watch the Market Action Report now:
February 2022
INTRO TAG
Stocks start off the year with a dismal performance for the month of January. With inflation at a fresh all-time high since 1982, will markets be able to handle the Federal Reserve’s tightening of their monetary policy to get inflation back under control or will investors suffer even more collateral damage in their portfolios.
That action starts, NOW!
INDEX PERFORMANCE RECAP
Although the major indices rallied into the end of the month, the damage was already done. The Dow Jones Industrials closed down 3.99% while the S&P 500 lost 5.82%. The Nasdaq had its worst January since 2008 and steepest one month drop since the pandemic began plunging 9.62%.
EQUITY UPDATE
January declines in the equity markets are fairly common, including in the two previous years which nonetheless ended with large annual gains. So, not all hope should be lost here. However, inflation is definitely an issue in this red-hot economy and the Federal Reserve is going to take action by raising interest rates to try and bring down the inflation. Generally speaking, any rise in interest rates will impact the earnings of companies and in turn make the stock prices drop explaining the precipitous declines we just experienced in high growth stocks this last month. Regardless of how many rate hikes are to come by year end, the market is adjusting for those now. Until stock prices get to a level where the price earnings multiple is reasonable to the assumed final interest rate of the Fed in addition to the earnings the companies post, stocks will continue to selloff and be volatile.
BOND UPDATE
Once again, all of the major bond indices bounced higher with the shorter end of the curve seeing the biggest gain of them all. The 5yr note jumped just over 17.5% from to 1.61% and the 10 yr note rose just shy of 10% to 1.78%. The 30yr bond rose just 3.96% to 2.1%.
As I noted last month, we should keep a close eye on the 10yr-2yr treasury spread. I stated that we really didn’t want to see a break below the most recent low of .73% here at the start of the year. As a break below this level would indicate a potential further decline and could pressure stocks. As of the recording of this video, the spread has dropped below .60% setting another multi-year low. Again, we really want to see this spread increase back towards the 1% level as that would indicate the market is limiting its concern that the Fed will kill the recovery with its removal of fiscal accommodation. The hope is we see longer term yields rise this year and the 10yr will rise towards and through the 2% level.
COMMODITY UPDATE
Crude oil steadily climbed higher throughout the month posting another 16.22% gain to close out at $88.30. The fundamental backdrop of oil remains bullish with a medium-term upside target of $105 in WTI.
As for metals, the more hawkish Fed was a major driver as the combination of a renewed upswing in the dollar, slower growth and potentially fading inflation pressures weighed on both copper and gold.
Peak to trough, Copper saw just over a 4.5% decline this month closing out at $4.33. Again, until we see a breakout above $4.75 or below $4.00, we will be maintaining a cautiously bullish stance based on the economy and global risk assets.
Gold also experienced a swift decline at month end to close out at $1798/oz. My comments for the last two month now have been that if inflation continues to rise, so too should the yellow brick. However, if inflation can cool off, Gold will most likely lose support and fall as a function of rising real interest rates and a continued rise in the dollar. Unless gold can breakout above $1880/oz, I will continue to maintain a neutral outlook on it.
CURRENCY UPDATE
After a brief move to the downside early on, the US Dollar had a nice steady rebound during the second half of the month before retracing some of its gains in the last couple days to close out with a minimal gain at $96.64. As I suggested last month, it is unlikely the dollar will be able to rise much from its current level in response to the Fed’s QE tapering plans.
ECONOMIC UPDATE
During the latest Fed meeting, Jerome Powell essentially promised a March rate hike. Additionally, he opened the door to a 50-basis point hike or three hikes over the next three meetings in March, May and June. This means we could see one more rate hike than the market was anticipating. This is why stocks dropped as much as they did for the month.
Inflation data remained the same and even showed some signs it may be peaking. If this is true and the market has already priced in a more aggressive Fed than what would be needed, this could lead to a relief rally in equities later in the year.
For markets to stabilize, we are going to need 1) The Fed to stop providing hawkish surprises 2) Inflation data to peak and recede and 3) Economic data to remain firm to eliminate concerns of stagflation.
THE WRAP
In closing, investors are waking up to a more hawkish Fed than they expected for 2022 and volatility has spiked as they all wiggle around to reposition themselves for what could be some difficult headwinds on big growth stocks. During times such as these, investors need to just stay calm and focus on owning stocks with solid balance sheets and strong earnings that produce a real product. Our models have are allocated as such and we will definitely proceed with caution as we continue to roll through the first quarter of 2022.
CPK FOCUS
For the month of February, the cash allocation in our equity models remains between 30% and 40% due to the model’s more aggressive nature. I am proud to say that this approach has kept our performance right in line with the major index’s year to date. Our broad focus remains on Domestic Equities and Commodities.
For Domestic Equities, our focus in on Mid Cap Value, Mid-Cap Blend and Small Cap Value with an emphasis in the Energy, Financials, Technology, Consumer Cyclicals and Industrial sectors.
As for Commodities, our focus remains on Energy and Industrial Metals.
CPK DISCLAIMER
As a reminder, my current allocation is not a recommendation. Regardless of what happens next, investors like you need to have a simple and yet solid financial plan that reduces RISK, COSTS and TAXES while securing the necessary income you need to maintain your lifestyle throughout retirement.
If you don’t have a plan OR you’re not comfortable with the plan you have, call me today to get pointed in the right direction.
I’m Chad Kunc and that puts a wrap on the February 2022 Market Action Report. Thanks for joining me. It’s time for me to get back to the markets.
For this guy, that action starts, NOW!