Last week was a brutal one for equities with the many of last year’s winners underperforming. The US market in general (and tech in particular) has suffered with the NASDAQ down 12% so far in 2022. And within the market, value is beating growth.
Higher interest rates are the number one culprit but question marks over some earnings reports, weaker economic numbers, and political risks, notably with respect of Ukraine, have all played a role.
Markets set to stabilise
So where do we go from here? First it is worth noting a profound change in sentiment. Last month, the market was willing to ignore the odd earnings disappointment, weaker data in some areas and of course the Omicron variant. But notwithstanding all of that, we expect some stability this week and cautiously suggest the next move is up.
Easing Omicron fears bode well for equities
Let’s begin with earnings. Yes, the like of Goldman Sachs and JP Morgan reported disappointing trading gains but that’s not an enduring problem. Now and again the traders get it wrong. More encouraging was the improvement in banks’ net interest margin and loan growth. Those should be enduring. And yes, retail sales fell heavily in the UK and the US in December but that reflected consumers buying early amid fears of shortages. Consumer demand will bounce back especially now that Omicron fears are receding.
Politics unlikely to move markets
Political concerns are to the fore. The Italian Presidential election will get going and Boris Johnson’s fate could be sealed by the Sue Gray report. But we don’t see them as market moving events. Ukraine certainly is and who knows what is in Putin’s mind? My guess is that he won’t want to stir things up too much until the Beijing Winter Olympics are over and the financial sanctions threatened by the US would hurt the Russian economy hard.
Clarity from the Fed should settle nerves
But when it comes to market fundamentals, we can be more confident of the outcome. There is plenty of economic data in the pipeline and the Federal Reserve is meeting this week. Yes, the Fed will be hawkish, but the press conference should help to settle market nerves. A slew of those companies reporting could well beat analysts’ estimates and the global economy is likely to recover from its soft patch and that means rising corporate earnings.
Monetary tightening and the end of bond buying programmes by the Fed the BoE and other central banks imply that bonds will have a torrid time. That’s a headwind for equities too but they should still eek out reasonable gains in 2022. We did say that January would see a choppy water for risk assets, but I didn’t expect the waves to quite this high. There are reasons to believe however, that calmer waters lie ahead.
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