Please find our most recent market review below. Following the commentary, you will find a table of returns for widely available ETFs that represent the major markets. Below that are five simple portfolio mixes, composed of low-cost Vanguard ETFs. These can be used as a guide against which to compare your portfolio mix. We hope this information is of value to you.
– The AdvicePeriod Team
Monthly Market Review
By Nathan Sonnenberg
AdvicePeriod Chief Investment Officer
January was the rockiest month for the markets since March of 2020, as both stocks and bonds recorded sharp declines. Among the culprits were persistently high inflation, rising interest rates and, in the case of stocks, increasing skepticism over high valuations.
U.S. stocks (VTI) ended January down 6%; outside of energy and certain commodities, most every asset class saw declines. Developed international stocks (VEA), meanwhile, declined 4%. Emerging market stocks did manage to eke out a .4% gain, largely on the strength of Chinese stocks. U.S. bonds (BND) and municipal bonds (MUB) fell 2.1% and 2.4%, respectively.
Inflation continued to be a key macroeconomic theme in January, as the annualized rate hit a nearly four-decade-high of 7%. In an effort to rein in the price increases, the Federal Reserve announced that it would phase out its bond buying activity by the end of March and would likely begin raising short-term interest rates during March. The markets appear to be anticipating three to four rate increases in 2022. Bond investors pushed up long-term interest rates, meanwhile, with yields on 10-year Treasury bonds jumping from 1.5% to 1.78%. The 30-year bond yield edged up as well, from 1.9% to 2.1%. Rising interest rates tend to hurt corporate earnings, and that can prompt sell-offs in the stock market.
The country’s output of goods and services ended the year strong, with real gross domestic product (GDP) increasing at an annual rate of 6.9% in the fourth quarter. First-quarter GDP is expected to slow dramatically however, with the Atlanta Fed projecting growth of just .1%.1
Meanwhile, fears that the Omicron COVID variant would dampen job creation in January proved to be unfounded. Employers added 467,000 jobs,2 triple the consensus forecast of 150,000. The unemployment rate edged up to 4% from 3.9% a month earlier. That wasn’t the only good news on the employment front: December’s jobs gains were revised strongly upward, from 199,000 to 510,000, and November’s numbers were revised from 249,000 to 647,000.
Looking ahead, the economy faces a range of potential obstacles, from slowing economic growth around the globe to continuing supply chain problems to persistent inflation and of course COVID. On top of all that, eyes will be on Washington, D.C., where the federal debt ceiling is rapidly approaching and Build Back Better legislation, which could inject money into the economy, has yet to pass. Finally, a Russian invasion of Ukraine would be a geopolitical shock that could test markets.
In 2021, strong overall stock returns were driven by remarkable earnings growth. That may not continue: While S&P 500 stocks’ average earnings grew 22% in the fourth quarter, they are projected to grow at an approximately 10% clip3 in the first quarter of this year.
Projections, of course, are only projections, a point underlined by January’s surprisingly strong employment data. Whether the subject is the economy or capital markets, wise investors avoid playing the guessing game. Remaining patient, diversified and focused on achieving your goals is the best way forward.
What You Pay For: The Percentage of Active Managers That Underperform Their Benchmarks
Trailing 10 Years Numbers As of December 31st, 2020 – S&P Spiva Scorecard
Percentage of US large-cap funds that underperformed their benchmarks
US large-cap benchmark:
Percentage of international funds that underperformed their benchmarks
S&P International 700
Percentage of emerging market funds that underperformed their benchmarks
Emerging Markets benchmark:
The S&P Dow Jones SPIVA Scorecard compares actively managed funds against their respective benchmarks semiannually.