The U.S. stock market had its worst start to the year since the global financial crisis, as the threat of higher interest rates, slowing corporate earnings and geopolitical tensions sent stocks tumbling across the board. areas.
The S&P 500 index fell 5.3% in January, its biggest monthly decline since the start of the coronavirus pandemic in March 2020 and the weakest January since the depths of the global financial crisis in 2009.
The blue-chip benchmark was on course for even more lackluster performance – last week it neared its worst January on record – until a 4% rally in the last two days of trading. scholarship of the month, Friday and Monday.
But despite a stronger ending, investors are bracing for more volatility.
Leaders of fund manager Franklin Templeton’s multi-asset division, for example, normally meet once a month to adjust the amount they allocate to different types of assets. But they decided to start meeting weekly to make sure they can react to volatility fast enough.
“It will be that type of year – we believe it will require a more agile approach to asset allocation,” said Wylie Tollette, head of client solutions at Franklin Templeton Investments.
January’s selloff began in the technology sector, where many companies could feel the brunt of higher interest rates. The Federal Reserve has sent hawkish signals in response to soaring inflation. Last week, Jay Powell, chairman, signaled that a first rate hike in March would be all but certain, and he declined to rule out an aggressive sequence of increases to follow.
Higher rates reduce the value investors place on future earnings, knocking the prices of companies that advertise themselves to investors with promises of longer-term growth. The tech-heavy Nasdaq Composite index fell 9%, its worst one-month drop since November 2008.
As U.S. companies report fourth-quarter results, earnings growth is also expected to slow after last year, when it was boosted by comparisons with a weak 2020.
While investors have been weighing rising rates and slowing growth for months, the past few weeks have also added an additional complication: the threat of war in Ukraine.
Geopolitical risks are notoriously difficult to assess in equity markets, but several investors said rising tensions over a possible Russian invasion helped spread weakness in tech stocks to the broader market in the second half of January.
“The situation in Ukraine is what took it from something that was really focused on rate sensitive areas to a riskier sell,” said Tim Murray, financial markets strategist at T Rowe Price.
Even without a war, a prolonged stalemate, including potential sanctions on Russia, could still drive up global energy prices at a time when economies are already struggling to get inflation under control.
Sebastian Raedler, head of European equity strategy at Bank of America, said “the growth cycle in Europe looks particularly vulnerable because energy prices have risen so much, which should weigh on industrial activity.”
So far, however, European markets have fared slightly better than the US, falling 3.8% year-to-date. The FTSE All-World Index fell 5.6%, its worst start to the year since 2016, when markets were rocked by worries about growth in China.
Once stocks started falling, it was harder than usual for them to stop, according to Jack Caffey, portfolio manager at JPMorgan Asset Management.
Years of steady rises in stock prices have discouraged portfolio managers from holding even small amounts of cash for fear of missing out on gains and risk criticism for underperforming benchmarks.
“Markets in the United States have become one-sided by nature – momentum is a powerful thing,” Caffey said. “We’ve taken away people’s ability to go against the grain. . . the less silver you hold, the more your ability to take advantage of dislocations is tested.
Yet despite the challenges, the underlying US economy still appears to be in decent shape. Corporate earnings growth may slow from last year’s highs, but should remain positive for most large companies, and investors are looking for opportunities amid volatility.
JPMorgan’s Caffey was among those highlighting mature tech companies they believe will be more resilient to inflation and can benefit from longer-term trends such as growing demand for semiconductors, rather than temporarily boost their business in the era of the pandemic.
Others, including Murray at T Rowe Price, said they focused on smaller companies and “quality” stocks which tend to have steadier earnings and stronger balance sheets.
“Any time you get a really strong market reaction, you have babies thrown out with the bathwater,” Murray said. “There are definitely some out there.”