Watch the CPK Market Action Report: January 2022
Happy New Year! Equities finished the year with a strong rally in the face of the fast-spreading Omicron variant. Can the strength of the economy overpower the will of the Omicron variant, or will the virus and future moves of the Federal Reserve and inflation prove to be too much to handle for investors and the markets?
Watch the Market Action Report now:
January 2022
INTRO TAG
Happy New Year! Equities finished the year with a strong rally in the face of the fast-spreading Omicron variant. Can the strength of the economy overpower the will of the Omicron variant, or will the virus and future moves of the Federal Reserve and inflation prove to be too much to handle for investors and the markets?
That action starts, NOW!
INDEX PERFORMANCE RECAP
The major indices recovered nicely from the November sell-off to post some much-needed positives gains at year end. The Dow Jones Industrials was up 6.81% and S&P 500 posted a gain of 5.61%. The Nasdaq was also up 2.56%.
EQUITY UPDATE
Equities were able to post a strong rally in the month to add to their impressive gains for the year. As we roll into 2022, it is important to recognize that the tailwinds we have been celebrating for the last two years from economic stimulus are coming to an end. Additionally, the Fed is tapering QE and might hike rates three times this year. That hasn’t happened since 2018 which presented a negative year for the S&P 500. While that doesn’t directly imply the index will finish down this year, it is important to note that if the pandemic is really coming to a “so-called” end, you can probably expect the economy and equity markets to experience some headwinds that will likely produce enhanced volatility in 2022.
BOND UPDATE
The major bond indices all bounced higher with the shorter end of the curve seeing the biggest gain of them all. The 2yr note jumped just over 30% from .56% to .73% while the 10yr rose 14% from 1.43% to 1.63%. On the longer end of the yield curve, the 30yr yield rose just over 7% to 1.90%.
As we enter 2022, it will be important to keep a close eye on the 10yr-2yr treasury spread. The most recent low of .73% is a level we don’t want to see broken at the start of the year. A break below this level would indicate a potential further decline and could pressure stocks. Ideally, we 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
After the route in Crude Oil during the month of November, the black gold was able to mount a nice rally and post of gain of just over 15% closing out the month at $75.21. Interestingly, the US oil output just hit an 18+ month high and that could present a new headwind for energy in the coming weeks and months ahead that may potentially pause the current rally.
Copper remains range bound in that $4.25 and $4.50 level. After touching a low of $4.18 for the month, it was able to rebound and closing out at a high for the month at $4.45. 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 closed higher for the month as well at $1827/oz. Reiterating my comments from last month, 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
Last month I suggested it is unlikely the dollar would be able to rise much from its current level in response to the Fed’s QE tapering plans. Turns out, I was right. The dollar finished the year down slightly after closing down for the month at $95.59.
ECONOMIC UPDATE
On the economic front, growth remains solid, inflation remains high and there doesn’t appear to be any signs that Omicron is slowing the economic recovery. We need to continue to look at inflation and growth data to confirm the Feds hawkish approach in 2022. Based on the most recent data, investors should expect the Fed to stay the course of ending QE in mid-March with rate hikes starting in June. While markets are not getting rattled by this just yet, I believe a removal of accommodation by the Central Bank will present additional volatility early in the year. Additionally, a continuation of high inflation and strong growth will most likely bring a more hawkish Fed and its counterparts, the Bank of England and ECB.
THE WRAP
In closing, the current situation simply isn’t as good as the S&P 500 valuations would imply, but markets are forecasting tools and clearly investors are forecasting that the Fed won’t be too hawkish, inflation will peak, and Omicron won’t be a headwind on growth. This is an optimistic path that has been right since March 2020. However, if the market is wrong, stocks could easily experience a 5-10% air pocket if not more. As such, we will definitely proceed with caution as we roll through the first quarter of 2022.
CPK FOCUS
For the month of January, the cash allocation in our equity models remains between 30% and 40% due to the model’s more aggressive nature. Our broad focus remains on Domestic Equities and Commodities.
For Domestic Equities, our attention remains with just Mid Cap Growth, Small Cap Growth and Mid-Cap Value with an emphasis in the Technology, Financials, Consumer Cyclicals, Industrial, Energy and Real Estate 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 January 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!