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January 2022 Monthly Review

"You Start the Year Off... Not So Fine"

By Loyd Johnson, Chief Investment Officer
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Loyd Johnson PhotoA Look Back

Of course, that is not quite the correct line from the 1960 single, Calendar Girl, sung by Neil Sedaka. The fun and frivolous song reached top five status on the U.S. charts. It was later recorded by the Beach Boys in 1978. The lyrics go through all 12 months on the calendar with some clever reference regarding a love interest…and January was “you start the year off fine.” Hearing the song recently was a stark reminder of just how un-fine this January was. The broad S&P 500 index was down over 5%, and reached the technical definition of a “correction”- down more than 10% from a recent high - earlier in the month. We had not seen that level of decline in stock markets since mid-2020. Historically, we experience stock market corrections around one and a half to two times per calendar year… so, from a timing standpoint…we were due. Domestic Small-Cap and International Developed stocks were worse, as Emerging Market equities finally led the way, negative by less than two percent. In fact, looking at the table above, it is flush with red as most asset classes were indeed in the red for the month. The lone positive performer was bank loans. On the economic front, the most recent inflation numbers for December were released in early January and showed CPI jumping to a 7% annualized number. That represented the largest 12-month increase since June of 1982. The Jobs report showed non-farm payrolls rising by 199,000 in December, a disappointing number versus expectations of nearly double. The actual unemployment rate fell to 3.9%, marking a new pandemic-era low. The employment numbers in the U.S. have increased by 18.8 million since April of 2020, but are still down by around 3.6 million from pre-pandemic levels. Finally, the highly anticipated meeting of the Fed took place in late January and the market gyrated back and forth as a result. With the official statements sounding not-so-hawkish, stock markets initially rallied. However, after a question and answer session with Chairman Powell, markets sold off as his responses were interpreted as being more aggressive with potential rate hikes. Current markets are expecting at least three .25% rate increases this year, with the likelihood of more standing near a 50/50 proposition.

A Look Ahead

So will February be more like a Valentine to align with the lyrics of the Calendar Girl song? Well, the jury is out, but the initial returns are promising. The last two trading days of January and the first couple in February have been positive. Several current and ex-Fed members have been making the media circuit, while downplaying Chairman Powell’s gloomy answering session. They talk about the necessity of being “data-driven” in their approach. The walk-back has been comforting to those that worry that an aggressive rate-hiking campaign could be the water that puts out the stock market fire in the short-run. Also, it has been a trying time for traditional bond investors. The benchmark Bloomberg Aggregate was down over 1.5% last year, and had a -2.15% start in January alone. After all, if you believe that investors are going to take money from one pot (stocks), then what pot will the money go into? We’ve made allocations to non-traditional asset classes for clients over the last several months with that idea in mind…other asset classes have a chance to do better in this more volatile environment too. As always, we do not prescribe to knee-jerk reactions, but rather look to take advantage of opportunities that the market gives…in either direction…with the firm belief that as the calendars roll on, we will be fine.