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Capital Markets Update: January 2022

Octopus7 February 2022

Market updates from January

In a Nutshell

Global trading had a rocky start to the year, in particular in the US, as tech and growth stocks fell out of favour, over concerns of an inflationary environment, shifts in consumer expectations, and increasingly hostile international relations with Russia. However not all stock markets were impacted quite as severely, with less tech-focused markets such as the FTSE recovering much of the lost ground by the end of the month on the back of positive earnings for UK large caps.

Inflationary Pressure

A common trend of 2021 continued into the new year, with inflation continuing to rise in many developed economies. Increased inflation figures from December were announced in the UK (5.4%), Eurozone (5.0%) and the US (7.0%), as cost of materials and production continued to rise.

This in part was caused by already stretched supply chains responding to the rapidly spreading Omicron variant, as further factory shutdowns occurred across the globe. The Caixin/Markit Manufacturing Purchasing Managers Index (PMI) for China decreased to 49.1 in January, indicating a contraction in output from the world’s second largest economy, which in turn could further affect prices for a while longer.

The continued increase in prices has fueled further speculation of interest rate rises beyond those already announced, and as well as investors moving to traditionally more secure assets including commodity, energy and banking stocks.

A Sentiment Shift

Concern of a prolonged inflationary period had investors turn their attention away from growth stocks — many of which had performed spectacularly well since the start of the pandemic, thereby causing a number of prices to fall this month from record highs.

Many titans of the technology sector all suffered a dip in prices in January, including Amazon (-12.2%) Tesla (-21.9%), and Meta (-7.5%). Even Microsoft’s share price continued to fall -7.1% in the month despite the announcement of record profits of $18.8 billion – an increase of 21% from the previous year.

‘Lockdown’ companies also suffered fairly heavy price corrections, such as Netflix (-28.5%) and Peloton (-22.4%). This came as subscription levels appear to have dipped, and expectations continue to be that consumers would return to pre-Covid habits.

These declines heavily impacted the tech-heavy NASDAQ and S&P 500 in particular, however the more diverse holdings of the FTSE meant that despite an increased level of volatility, it was able to remain broadly level.

It is worth noting that despite the somewhat dramatic drop, many prices simply returned to those seen in mid-to-late 2021, so over the long term still have provided solid gains for investors. Short term falls to markets are also relatively common to bear as a long term investor, but as outlined later in this post, research shows they can often point to healthy returns over the following 12 months. So there’s room for optimism.

Trouble in Ukraine

A further factor causing market jitters this month was the increased hostility between Russia and the West, as both Russian and NATO troops continue to increase at Ukraine’s eastern border.

As the biggest exporter of gas, the second largest exporter of oil, and a major exporter of metals, base resources and agriculture, deteriorating relations with Russia could significantly affect already heightened commodity prices, with fears that they could ‘turn off the gas' to Europe if conflict were to escalate further, and even more so if sanctions were to be imposed in response. This would exacerbate manufacturing costs which had already risen during 2021, and could in turn continue to push inflation upwards, and while this continues we would expect market volatility to remain heightened.

Looking ahead

Despite a somewhat arduous beginning for the year in many global markets, those adopting a long term investment approach will come to expect volatile periods as part of the natural market cycle. In the US for example, research estimates that there have been 21 non-recession corrections since 1950, where stocks fell by an average of 15% peak-to-trough without the national economy contracting. So these events are not uncommon.

More interestingly, that same research also showed that buying US stocks whenever they fell 10% from their peak, regardless of whether they continued to fall further or not, has on average generated returns of 15% over the next 12 months.

As such, good investors generally block out short term noise, whilst those targeting long term growth may therefore view dips in prices as good buying opportunities, as many companies remain profitable, healthy, and cash rich. Whilst nobody knows for certain what tomorrow will bring, as always, a diverse investment portfolio that utilises a wide range of indices can help to weather market volatility in periods such as this, and provide greater security in meeting one’s financial goals.

Looking ahead this year we would still expect to see increased growth overall, as vaccines continue to roll out, the novelty of covid reduces, and countries move further out of lockdown.

Important information:

The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation.

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