In the Macro
- Rate hikes imminent from central banks
- America’s fastest GDP growth since the 1980s
In the Micro
- A pullback in stocks amid heightened volatility
In the Macro
Rate hikes imminent from central banks
All eyes were on the central banks as investors waited anxiously for news of an interest rate hike. Both the Federal Reserve and the Bank of Canada had meetings during the week of January 24, and though neither announced a change to rates, both signaled rates would be rising soon.
On January 26, the Federal Reserve set the stage to begin hiking interest rates in the US following their next meeting in March. Chairman Jerome Powell suggested, “the economy no longer needs sustained high levels of monetary policy support.” He stated, “that is why we are phasing out our asset purchases…and we expect it will soon be appropriate to raise the target range for the federal funds rate.”
Following the meeting, the 10-year Treasury yield rose another eight basis points. The yield was 1.51% at the end of 2021. It has since been moving higher as investors prepare for the first-rate hike since 2018. After the announcement from the Fed, the 10-year yield rose to 1.86%.
Source: RBC Wealth Management
In Canada, it was more of the same. The central bank confirmed inflation fears, chose not to raise rates and prepared investors for a change soon. The move, or lack thereof, surprised the markets as it expected the Bank of Canada to announce a 0.25% increase in their overnight rate.
In a statement from the Bank of Canada, it “expects interest rates will need to increase, with the timing and pace of those increases guided by the Bank’s commitment to achieving the 2% inflation target.” The bank’s Governor Tiff Macklem went as far as to say, “everybody should expect interest rates to be on a rising path.”
The market took those words to heart and has adjusted expectations for a rate hike in five weeks at the next BOC meeting. It has priced in a total of six interest rate hikes.
America’s fastest GDP growth since the 1980s
America’s economy continues to recover from the pandemic, with Q4 as no exception. While economists had worried about the impact of rising Covid-19 cases, the US saw its gross domestic product (GDP) expand at an annualized rate of 6.9% over the quarter. GDP growth for 2021 came in at 5.7%, the quickest increase since 1984.
Throughout the pandemic, consumer spending shifted towards tangible goods as lockdowns impacted their ability to spend on services. This is slowly reversing, with more money going towards in-person dining and travel. Over Q4 2021, spending on services rose 4.7%, with goods rising by a measly 0.5%. With supply chain issues persisting, a lack of availability may have added to depressed spending on goods in certain sectors.
Source: The New York Times
In the Micro
A pullback in stocks amid heightened volatility
After a stellar year of performance in 2021, stocks have slipped lower over the past couple of weeks. On Thursday, January 20, the S&P500 closed below 4,500 points for the first time in a month, and the following day ended the worst week for the S&P500 and the Nasdaq since the pandemic’s start. Prices fell 5.7% and 7.55%, respectively, over the week.
From there, US stocks continued the decline only to rally on Friday, January 28. The S&P500 finally saw a positive weekly return but is still lower for the year. As of market close on the 28th, the index is 7% below its early January high.
Not only has the month reversed some of the gains from last year, but it also saw a significant increase in volatility. Consider the trading day Monday, January 24, for example. That day, the Nasdaq fell by 4.9% during trading only to end the day 0.3% higher. The DJIA fell over 1,000 points during the trading day yet still closed 99 points higher in the end. These massive swings in intra-day trading were not typical last year, though we may be in store for at least some level of volatility going forward.
According to LPL Financial’s Ryan Detrick, “investors need to be aware that 2022 probably will be a much rougher ride… With rate hikes coming and the historically volatile midterm year on the horizon, more violent ups and downs could be in store for investors this year.” We have seen a bit of this already, and, on Tuesday, January 25, the volatility index soared, reaching a level not seen since November 2020.
Source: LPL Research
Despite what we saw in 2021, a correction in the stock market is normal. Since 1950, the S&P500 has had a 5% pullback an average of 3 times per year. The index has seen a 10% correction almost annually for the same time period. Based on this data, the market is overdue for a more significant move lower as we haven’t seen prices drop by 10% since the start of the pandemic.
A correction does not mean the end of the world, though. Since 1980, one year after a 10% correction, the S&P500 has been higher 90% of the time. And, it has been higher by 24.8% on average.
This data reinforces a concept we speak of often; diversify, invest for the long-term and follow your investment plan. In the meantime, forget the noise and any day-to-day volatility.