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February 2022 Market Insights

Published: 02/04/2022

By: Christopher Coyle

February 2022 Market Insights

Market Insights

A periodic newsletter from Idaho Trust Bank

Domestic stock indices had a rocky start to the year following very strong results in 2021. As the economy has improved, interest rates and inflation levels have begun to move up, which has hurt the performance of many fixed-income investments. More importantly, the direction of future monetary policy has emerged as a major concern. These worries have increased uncertainty and added to volatility in recent weeks. Despite these valid concerns, it is important to remember that these movements are a normal part of stock market activity.
 

An Increase in Volatility

The S&P 500 experienced a 10% decline from the all-time high, established in early January. This correction has been primarily driven by concerns that the Federal Reserve Bank (Fed) will craft a much more restrictive monetary policy designed to combat higher inflation. Consequently, a number of major U.S. equity markets are in or near ‘correction’ territory (defined by a decline of 10% or more).

Last year, most equity indices experienced very strong returns. Going into 2022, there are many challenges facing investors such as: the prospect of rising interest rates; higher input costs; a slowing U.S. economy; the ongoing pandemic; and valuations that are above historical norms. Escalating tensions in Ukraine between NATO and Russia have surfaced as another concern facing investors.

Given these challenges, it makes sense that technology stocks have experienced some of the largest declines in their share prices. Technology companies have been one of the primary beneficiaries of the Covid-related restrictions, so as some of these forces abate, these stocks have contracted. The NASDAQ index, which peaked in November 2021, has declined by about 17%. Technology equities have long been susceptible to the aforementioned issues, and as rates rise, investors’ willingness to look beyond poor near-term earnings prospects – a hallmark of some emerging technology businesses diminishes. In addition, these firms need capital to grow, which in the current environment might be more difficult than it has been in recent memory. Finally, valuation levels that are well above the average stock, make technology and growth companies more susceptible to market declines as their Price to earnings multiples contract.
 
Looking ahead, these issues are unlikely to be resolved anytime soon. The Fed has made it clear that it will continue normalizing policy this year as an increasingly tight labor market with millions of unfilled positions will likely continue to put upward pressure on wages. Additionally, the supply chain issues that have contributed to higher inflation will likely continue to be an issue into the summer months.
 
Inflation concerns have dominated headlines over the past few months. The consumer-price index rose 0.5% in December from a month earlier, and the year-over-year rate surged to 7.0% (see chart). The data represents an increase from the 6.8% annual pace experienced in November. This suggests that the factors that have pushed up prices (supply chain issues, strong consumer demand, and labor shortages) are likely to keep pushing prices higher in the coming months.
Consumer Price Index
Consumer prices climbed to a four-decade high for the second straight month in December, putting pressure on the Fed to act quickly to curb inflation. These numbers will fuel expectations that the central bank could raise interest rates both earlier and faster than initially expected. Fed Chairman Jerome Powell recently testified that he expects inflationary pressures to last well into the middle of this year and vowed to use the central bank’s tools—including raising interest rates—to halt the swift increase in prices.
 
Annual Returns and Intra-Year Declines

Stock Market Corrections

Most major equity markets are in the midst of a correction. The market
declines are clearly a result of the unknown impact of tighter monetary
policy. However, we would like to provide some historical perspective to
these events. The chart on the prior page identifies the annual return of the S&P 500 each year since 1980. The grey bar represents the annual return each year through 2019. The red dot below each bar shows the intra-year decline during that year. As you can see from the data, market corrections occur every year. The average decline during the period from 1980 until 2021 was 14.0%. The above chart clearly shows that high single-digit or low double-digit declines are common in most years. In fact, the last major correction occurred in 2020 when the market fell by 34%, over concerns surrounding the impact of COVID-19.
 

Conclusion

Given the large number of unknowns surrounding coronavirus, it is likely that volatility levels will remain high going into the spring. Inflationary pressures could add to concerns that the Fed will further tighten monetary policy. Therefore, markets could continue to be volatile in the near term. However, we believe that the long-term investment outlook remains solid with a healthy economic backdrop.
 
 
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4. Certain products may be provided by a Financial Consultant of Idaho Trust Financial. Securities and insurance products are offered through LPL Financial and its affiliates, Member FINRA/SIPC. Idaho Trust Bank is not a registered broker/dealer and has a brokerage affiliate arrangement with LPL Financial. Idaho Trust Bank is a separate company from LPL Financial. Idaho Trust Bank does not provide tax or legal advice.

5. Exchange Traded Funds (ETF), mutual funds and individual stocks are subject to risks and fluctuate in value. Neither asset allocation nor diversification assure a profit or protect against loss. International investing involves special risks including increased volatility, political risks, and differences in auditing and other financial standards. Small-cap stocks have historically experienced greater volatility than average. High yield, lower-rated securities generally entail greater market, credit and liquidity risks than investment grade securities and may include higher volatility and higher risk of default. Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices. Past performance is no guarantee of future results. No representation is hereby made of the risk and/or return of any particular portfolio. There is no guarantee that any suggested investment strategy will work in any market. You should fully and carefully consider all objectives, risks, expenses and fee before you invest.

6. Portfolios are illustrative only. ActualLifeNeedsTM Portfolios will vary from time to time as determined by Idaho Trust Bank. No representation is hereby made of the risk and/or return of any particular portfolio. There is no guarantee that any suggested investment strategy will work in any market. You should fully and carefully consider all objectives, risks, expenses and fees before you invest. Past performance is no guarantee of future results. Exchange Traded Funds (ETF), mutual funds and individual stocks are subject to risks and fluctuate in value. Neither asset allocation nor diversification assure a profit or protect against loss. International investing involves special risks including increased volatility, political risks, differences in auditing and other financial standards. Small-cap stocks have historically experienced greater volatility than average. High yield, lower-rated securities generally entail greater market, credit and liquidity risks than investment grade securities and may include higher volatility and higher risk of default. Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices. Past performance is no guarantee of future results. For more information about performance of Idaho Trust Strategies and our performance calculation methodology, please contact us. Actual client performance may vary from the performance of model portfolios and/or any strategy. No representation is hereby made of the risk and/or return of any particular portfolio. There is no guarantee that any suggested investment strategy will work in any market. You should fully and carefully consider all objectives, risks, expenses and fees before you invest.

Portfolios are illustrative only. Actual LifeNeeds™ Portfolios will vary from time to time as determined by Idaho

Trust Bank. The Idaho Trust investment strategies will vary from time to time as determined by Idaho Trust Bank. The information and analysis expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. Information contained herein has been obtained by sources we consider reliable, but is not guaranteed. Any opinions expressed are based on our interpretation of data available to us at the time of the original publication of the report. These opinions are subject to change at any time without notice.

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