Rates Up, Stocks Down

Jan 25, 2022

By Ben Norris, CFA, Securities Research Analyst, Associate Vice President

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Stocks had their worst week since the beginning of the Covid pandemic last week. The S&P 500 (SPX) finished the week down 5.67% and notched its third straight week of losses. Meanwhile, the Dow Jones Industrial Average (DJIA) lost 4.55%. The Information Technology-heavy Nasdaq 100 shed 7.51%. Year-to-date the SPX, DJIA, and Nasdaq 100 are down 7.66%, 5.63%, and 11.51%, respectively. The Nasdaq’s performance so far this year puts the index squarely in “correction” territory while the S&P 500 isn’t far off either. There are a myriad of factors contributing to weak stock performance in 2022, especially the prospect of higher interest rates. Growth stocks, which are more sensitive to higher rates than their value counterparts have been, were hit particularly hard as a result. The S&P 500 Growth index is down 11.81% so far this year while the S&P 500 Value index has lost just 3.06% through last Friday’s close. Investors tend to feel that the earnings of growth stocks, which can be less certain than other stocks, are worth less when discounted at comparatively higher interest rates. Adding fuel to the fire last week was a relatively disappointing start to the fourth-quarter earnings season. Several stocks reported earnings that failed to meet Wall Street’s high expectations and were penalized as a result.

From a sector perspective, stocks in Information Technology have been one of the worst-performing groups in 2022 as the sector is heavily skewed toward growth versus value. The sector was down nearly 7% last week and is down 11.34% for the year. Consumer Discretionary stocks also had a rough week, losing 8.48%, taking the sector’s year-to-date loss to 12.16%. The Communication Services and Financials sectors both were relative underperformers last week as well. On the other hand, Energy continues to be an outperformer on higher crude oil and natural gas prices, which have helped bolster earnings. While the sector was down 3.08% last week, it outperformed the broader market and remains the only sector showing positive performance so far in 2022, gaining over 12%. Other outperforming sectors last week included the traditionally “defensive” sectors that investors seek out when markets experience turbulence – Consumer Staples, Utilities, Health Care, and Real Estate. I will say that I would not be surprised if markets fall farther from here given the uneasiness over higher rates, a potentially shrinking Federal Reserve balance sheet, ongoing Covid-19 issues, and an emerging geopolitical threat from Russia potentially invading Ukraine. At the same time, I do think that the fourth-quarter earnings season will be solid by the time it wraps up that should act as somewhat of a ballast for choppy markets.

Last week was shortened by the Martin Luther King Jr. holiday but was still packed with interesting developments in the markets. The yield on the 10-year U.S.  Treasury Note continued its rapid ascent, reaching 1.9% before retreating as the week progressed. As of December, the yield on the 10-year was below 1.4%; this has been a notably large and fast move higher as investors position for looming Federal Reserve rate hikes and ongoing inflation. At the same time, the yield curve has continued to flatten. The current spread between the 2-year and 10-year yields is just 0.75%, while a year ago the spread was nearly 1%. I would expect the curve to continue flattening as the Fed pushes the short end of the curve higher with its actions in the market. Many investors like to keep an eye on the yield curve for its ability to predict recessions when it becomes inverted (when the yield of shorter-termed bonds is higher than those of longer- termed bonds).

Speaking of inflation, there were no formal inflation readings last week, but the prior reading showed a number that was at its highest level in 40 years. Higher inflation continues to be a headache for consumers and corporations alike, and many executives will likely blame inflation (at least in part) for any issues in their earnings results. The Federal Reserve is scheduled to meet on Tuesday and Wednesday this week and inflation (and committee’s coming decision to hike rates in response) will be a focus. Another notable development last week came in the form of disappointing employment figures. Initial and Continuing jobless claims came in above their recent lows and higher than consensus expectations. Weekly jobless claims jumped to 286,000 last week, up from 230,000 the week prior and a recent record low below 190,000. In other economic news, homebuilding indicators came in better-than-expected last week despite continued labor, supply chain, and raw material cost issues.

The highlight for the upcoming week is the previously mentioned Federal Reserve meeting on Tuesday and Wednesday with a press conference featuring Fed Chairman Jerome Powell on Wednesday afternoon. Overall, this is a busy week with corporate earnings and a heavy slate of economic announcements.

Date Report Previous Consensus
Monday 1/24/2022 Markit Services PMI 57.6 50.9
Tuesday 1/25/2022 Consumer Confidence Index 115.8 112.0
FHFA National Home Price Index (y/y) +17.4%
Wednesday 1/26/2022 FOMC Statement and Press Conference
Advance Report on Trade in Goods $97.8B
Thursday 1/27/2022 Initial Jobless Claims 286,000 260,000
Continuing Jobless Claims 1.64M
Durable Goods Orders 2.6% -0.1%
Friday 1/28/2022 PCE Inflation (month change) 0.6%
PCE Inflation (y/y) 5.7%
U. Michigan Consumer Sentiment Index 68.8 68.5
U. Michigan 5-year Inflation expectations 3.1%


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