Sovereign Wealth Partners and InvestSense Pty Ltd
The US market bore the brunt of some wild intraday swings through January, as the market sought to discount the likely impact of higher interest rates in the all-important US government bond market and in particular the large US tech stocks (whose long-term earnings profiles are most affected by changes in discount rates).
This left the S&P 500 and the local S&P/ASX 200 down around 7% for the month while the tech-focused Nasdaq was down around 12%. Noteworthy, however, was the subsequent decline in the Australian dollar which insulated unhedged Australian investors to some extent.
The last week of January, however, brought about higher-than-expected Australian inflation print which brought some of that shorter-term rate uncertainty and intra-day equity volatility to Australian shores, underpinning the fact that inflation uncertainty is likely to reverberate around the world for a while longer.
Looking through the noise though there has been a more consistent rotation throughout January – it is the same stocks that achieved outsized gains in the last half of 2021 that have been worse affected so far this year. While many markets that lagged last year are either up this year or have been left relatively unscathed. To put things in context:
- The S&P 500 ended the month at the same level it was just before Christmas.
- The Nasdaq has erased most of the gains from last year but it’s biggest constituents, Microsoft, Apple and Google remain up 25%, 40% and 16% respectively (even after double digit falls so far this year).
- The FTSE 100 remains in positive territory for 2022 and up 15% over the last year. Continental Europe is down a few percent this year but also up 15% over one year.
- Asian and Latin American Emerging markets have also been resilient this year, having fallen from grace last year, and so now trade on much more attractive valuation multiples. Many of the Chinese tech companies that were rocked by government intervention last year are actually up this year.
- Many managers with an ‘old school’ value approach significantly lagged the global equity market last year (even though they achieved returns of 10-20%) and are in positive territory this year.
Bond yields rose around most of the world (and notably Europe) although they did fall back a little in Australia and (more importantly) the US toward the end of the month. More ominously, modest rises in credit spreads started to gather pace, even if you would still call it an easing from historically tight levels. Still, this is worth keeping an eye on as the Fed has intimated that, while they are less likely to care about the stock market, the credit market and its role in providing liquidity to individuals and corporations is of much greater concern.
Market Returns – 1 Month to 31 January 2022 (in AUD)
There is some statistical basis to the saying ‘as goes January so goes the rest of the year’. You don’t get to choose whether you experience the exception that proves the rule so we would generally relegate that to the superstition bin, but one thing is for sure – the market climate of 2022 so far is very different from 2021. It may well ‘be different this time’ but it is certainly worth thinking about what happens if the markets winds change again.
Lastly, the US earnings season will probably start to get slightly less eventful now the most of the big tech names are out of the way but just under half of the US market is still to report and there will be some more results from large Asian and European companies.