Market Update 1-31-2022

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It was a BUSY week full of economic data updates, Q4 earnings releases, and even an FOMC statement and press conference. And while the market finally finished a week in 2022 in the black, it was a volatile 5 days. Get more details below for this week’s market update or listen to this week’s episode of Finance Explained.

Last Week in the Market

While the market may have finally finished a week up for the first time since the start of 2022, it was a bumpy ride to get there. The market finished the week up +0.8%, but had far wilder intraday swings than typical. Over the last 5 years, the median intraday low and high, relative to the prior day close, is +/- 30-40bps. Last week, we saw intraday movements of daily of 10x that, with intraday lows down as much as 4%, and the same day the market ended the day up.

We can also see this heightened volatility reflected in the VIX, or as it’s officially known, the CBOE SPX Volatility Index. Sometimes referred to as the “fear index”, the VIX measures the stock market’s expectation of volatility based on options sold on the S&P 500. Options give investors the right to buy (call option) or sell (put option) an underlying asset at a specific price over a specific period of time, and the price of options is a function of expected volatility. For those of you who may be newer to investing, or haven’t invested through market cycles before – prepare yourself for a year of higher volatility. It’s driven by uncertainty around a multitude of factors including inflation, rising interest rates, the impact of both on corporate earnings, and now, we’ve got potential geo-political risks looming as well with Russia and Ukraine, which is also drawing in much of Europe and the US.

The market is now down -7.0% year-to-date through January 28th. As investor interest rate expectations meet with Fed’s actual rate increases, as inflation impacts corporate profit margins, and the huge increase in retail investors who started investing for the first time in recent years are far more skittish and run for exits at first signs of sell-offs, exacerbating volatility.

As anticipated following the Fed’s December meeting, bond yields continue torise in 2022. The yield on 10-year treasury bonds spiked on Wednesday following the Fed’s FOMC press conference on Wednesday, before tapering off, while still ending the week up slightly at 1.778%. While many investors anticipated their announcement of rate increases beginning in March, the Fed also released principles they will follow in the future for reducing the Fed balance sheet, which is likely more aggressive action than investors may have expected.

The Fed has been reducing the number of Treasury bonds and mortgage-backed securities it purchases every month, a planned reduction they first announced in November, and then accelerated in December. Those purchases are scheduled to end completely by March. This slows the increase in the money supply, removing the Fed as a major buyer in these markets, which has the effect of raising longer-term interest rates while also hopefully easing inflation. The next and more aggressive step is then selling off (or not replacing bonds as they mature) the assets they hold on their balance sheet – this reduces the money supply, and further raises long-term interest rates.

Are the Fed’s actions and proposed actions having their intended effect? Slowly, yes. Medium-term interest rates on treasury bonds continued to rise last week, anticipating the Fed’s rate increases which they have essentially confirmed will start in March, after their next FOMC meeting, scheduled for March 15-16. We also continue to see the spread between treasury bonds and inflation-linked securities continue to subside, reflecting investor expectations that inflation should start cooling soon too.

Year-to-date, the only asset class in positive territory is Commodities (+7.2%), largely driven by rising oil prices, which are now up over 66% vs. last year and up 15% even since just the end of 2021.

This is impacting the stock market as well, where the only sector of the market in positive territory year-to-date is Energy, up +18.3% through the end of last week. Every other sector of the stock market is in the red. Growth and tech stocks are being hit the hardest, with the Nasdaq down -12.0% for the first 4 weeks of the year. Why? A few reasons – 1) they had the furthest to fall, many companies being significant beneficiaries during the pandemic, making earnings comparisons and growth rates hard to maintain going forward and 2) they are most sensitive to increases in interest rates, given their high valuation ratios.

To better understand this relationship between the stock market, company earnings, valuation ratios and interest rates, be sure to check out 5 Factors that Drive the Stock Market.

Other major economic data releases for the week included:

  • Wednesday 1/26
    • New Home Sales (and prices)
    • Fed’s FOMC Meeting Press Conference
  • Thursday 1/27
    • Q4 2021 GDP – 1st Estimate
  • Friday 1/28
    • Disposable Income, Personal Outlays (aka what we spend) & PCE Price Index

We also got the usual Thursday Weekly Jobless Claims data, for the week ended January 22, 2022, as well as weekly Fed balance sheet data (to track their progress as asset purchase tapering), and the latest on mortgage rates. More on all these stories below or get the full update on this week’s episode of Finance Explained.

December New Home Sales: Prices +3.4% YOY

Last week we got the third major housing market data release for December: Monthly New Residential Sales, which is jointly released by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development. This reports new single-family homes sold on a seasonally adjusted annual basis, as well as median sales prices of new houses sold and the seasonally-adjusted estimate of new houses for sale, or inventory.

In December, median sales prices for new homes was $377,700, up +3.4% vs. the year prior, but down from as high as $421,500 in October. Does this mean home prices are falling? Not necessarily. While sales numbers are adjusted for seasonality, median sale prices are not, and the market always softens somewhat in winter months. For the entire year, the median home price for 2021 was $392,900, up +16.6% vs. 2020 (median sales price $336,900).

We are, however, seeing inventory increase. Homes for sale were up +35.1% vs. the year prior, and up nearly has much relative to historical median inventories. This is a good thing and should help alleviate, with time, the supply constraints in the housing market.

The reason why I don’t see the decline in median sales price as a lasting trend? If you look at the new homes sold by price range, the lower end of the market continues to shrink. In 2021, there were effectively no new homes built under $150,000, and nearly half of all new homes sold were priced over $400,000. The rising cost of construction materials, labor plus heightened demand just don’t support lower price points for new homes.

For more insights on the housing market, be sure to check out Is This A Good Time to Buy a House? and listen to the podcast featuring Zillow Economist Nicole Bachaud sharing her insights and outlook for the 2022 housing market.

Next Data Point?
January Monthly New Residential Construction will be released on February 17th
January Existing Home Sales will be released on February 18th
January New Residential Sales will be released on February 24th
Primary Mortgage Market Survey is released by Freddie Mac every Thursday

Q4 2021 GDP: +6.9% growth for Q4, +5.7% growth for 2021

On Thursday, the Bureau of Economic Analysis released its first estimate for Q4 and full year 2021 GDP. Real GDP, adjusted for the impact of inflation, grew by +6.9% on a seasonally adjusted annual basis in Q4, and +5.7% for the full year, relative to 2020, which was down -3.4%. Current dollar GDP, unadjusted for inflation, increased +14.3% in Q4 and 10.0% for the year.

Growth was driven by increases in private inventory investment (as retailers try to offset the impacts of supply chain uncertainties), continued increases in personal consumption expenditures (i.e. what you and I spend), and nonresidential fixed investment. These were offset by decreases in government spending, largely a function of the end of Covid stimulus spending, and rising net imports (we import more than we export).

While personal consumption increased, real disposable personal income declined by -5.8% in the quarter. This drove a decline in the savings rate to 7.4% in Q4 vs. 9.5% in Q3. This trend – declining real income vs. increasing expenditures is not sustainable, and a key reason that many economists anticipate growth will slow as we move forward into 2022.

Remember that the US is a very consumer-driven economy. Nearly two-thirds of US GDP is driven by consumer expenditures, and over the last 75 years, that has shifted more and more towards consumer services. During the last 2 years, as a result of the pandemic response, there was an abrupt shift in consumer spending, away from services and towards goods, especially durable goods. Durable goods are considered items that have a life span of 3 years or more, like cars, furniture, appliances.

Historically, consumer demand has been very predictable. This allowed businesses to reduce inventory investment and increase reliance on the supply chain. The abrupt shift in demand left businesses ill-prepared, added strain to an already stressed supply chain, and left many with inventory shortages that pandemic-related production declines still have not caught up with. The combination of heightened demand vs. reduced supply is one of the contributing factors to inflation.

As the Fed raises interest rates this year, I would expect to see savings rates increase and expenditures slow, which should reduce inflation, but also realize it may slow GDP growth and even lead to some declines. That is the balancing act the Fed is trying to navigate – cooling demand enough to slow price increases, without cooling it so much we head into another recession.

Next Data Point?
Q4 2021 GDP Second Estimate will be released on February 24th

December Income, Outlays & PCE Price Index

While we only get GDP updates quarterly, the Bureau of Economic Analysis releases reports on key components of GDP, like Disposable Income and Personal Expenditures Monthly. On Friday, the Personal Income and Outlays report for December was released. It also includes the PCE Price Index, the Fed’s preferred measure of inflation, which reflects the price changes on our actual consumer expenditures.

For December, Disposable Personal Income was up +0.2%, while Personal Consumption Expenditures were down -0.6%. Adjusted for inflation, DPI was down -0.2%, while PCE was down -1.0%. Many say December was expenditures were negatively impacted by Omicron, as well as many doing holiday shopping earlier in the season given supply chain concerns.

However, if we zoom in on the data, we can see that personal consumption expenditures remain elevated vs. the long-term trend line, while income has returned to long-term trend levels. While higher savings rates in the last 2 years can support that mismatch for a time, it isn’t sustainable forever.

The PCE Price Index for December was up +5.8% vs. 2020, with energy, up +29.9%, and goods, up +8.8%, the biggest drivers of price increases. Price increase for durable goods have risen the most, and are most impacted by supply chain constraints and rising transportation costs.

Next Data Point?
January Personal Income and Outlays will be released on February 25th

Q4 2021 Earnings Season: 33% Reported, 77% Beating Earnings

Based on Factset’s Earnings Insights report, so far through January 28th, 33% of S&P 500 companies had reported earnings, with 77% of those reporting beating earnings expectations. So if companies’ earnings reports are generally going well, what’s with the market volatility and sell-off in January?

Remember that the stock market is a leading economic indicator, and more than anything trades off of investor’s earnings expectations. As we look at analyst estimates for 2022, as well as company guidance, earning’s growth expectations are down vs. 2021.

Especially as we look at expectations for early 2022, top-line revenue growth is higher than earnings growth. This is characteristic of an inflationary environment. Revenues rise as companies raise prices, but they can’t raise them fast enough to offset the cost increases they are experiencing, leading to profit margin compressions and slower earnings growth.

The combination of lower earnings growth expectations and rising interest rates is also leading to a correction in valuation ratios. Stocks are often valued as a multiple of their earnings, a multiple that is determined as a function of earnings growth rates and interest rates. With growth expectations falling and interest rates rising, it’s a double whammy to valuation ratios, both pushing them down, and stock prices with it. Even with this decline in valuation ratios, they are still above the 5-year and 10-year averages, so there could be more to go. The current forward price to earnings ratio is 19.2 vs. the 5-year average of 18.5 and 10-year average of 16.7.

For more on valuation ratios and how stocks are valued, be sure to check out What Drices the Stock Market.

Weekly Jobless Claims for 1/22/2021: 260,000 new claims

Weekly jobless claims dropped after the prior week’s spike… For the week ended January 22nd, new initial jobless claims were 260,000. This is an decrease of 30,000 from the previous week’s revised level (290,000). Continued claims for the week ended January 15th increased to 1.675 million, an increase of 51,000 from the previous week’s revised level. While insured unemployment has been increasing in January, this is still a relatively low level of insured unemployment; it represents a 1.2% insured unemployed rate, unchanged from the week prior, and the 4-week average is the lowest it has been since 1973.

Remember, claims data is seasonally adjusted, so should account for the normal holiday seasonality. Many attribute recent increase in weekly claims to Omicron impacts. I will continue to watch them weekly, as the closest to real-time data there is on the labor market, one of the biggest areas of concern in the current economy.

Next Data Point?
Weekly jobless claims are released by the Dept. of Labor every Thursday
Monthly Employment Situation Report is released by the Bureau of Labor Statistics the first Friday of each month

Pandemic Update

The identification of Omicron the week of Thanksgiving, and its subsequent spread globally, has significantly changed the data points on the pandemic, for many reasons.

The spread of Omicron over the last 6-8 weeks has exceeded testing capabilities in many areas, making record-breaking reported cases likely an understatement of actual cases. This makes hospitalizations and deaths a more reliable indicator of the breadth of infection at this point. And while those too have seen increases, even relative to the likely understated reported case numbers, the rate of hospitalization and death associated with this Omicron wave is down significantly vs. prior variants. Hospitalizations and deaths also still remain far more prevalent in older age cohorts.

Some good news? The sharp decline many other countries have seen in the Omicron wave seems to be happening here in the US as well. New cases are down over 30% since mid-January, and hospital admissions are also in decline. Deaths, however, which come at a lag to new cases, appear to just be hitting their peak.

The Federal government and states continue to urge eligible populations to get vaccinated and boosted, as vaccination does continue to be associated with a lower risk of severe illness and hospitalization, and many regions’ hospital systems are strained given current infection rates.

Next Data Point?
CDC tracks and reports pandemic data daily via the CDC Covid Data Tracker

This week in the markets, Q4 earnings season continues, with more than 100 S&P 500 companies reporting – be aware that there may be even more volatility in the market as a whole and in individual names over the next few weeks as company’s report earnings and give guidance and outlooks for 2022.

On the economic front, it’s a bit quieter but mostly data points on the labor market. Look for the JOLTS Report for December, reporting job openings and quits, the normal weekly jobless claims report on Thursday, and Friday, the Employment Situation report for January, which reports the unemployment rate.

For this week’s podcast deep dive, tune in to hear from fellow finance mom and newly published author, Jessi Fearon. She shares some insights into her family’s journey to debt freedom, all about her new book, Getting Good with Money, including her thoughts on the Two-Income Trap and the Four Money Types, and the single step that had the biggest impact on her family finances.

Questions about this week’s update or recent financial headlines? Tune in to Live Q&A with Family Finance Mom every Monday and Wednesday at 9AM ET on Instagram. Look for the question box in stories to leave your questions, or watch and ask them live.

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About Meghan

Meghan spent nearly a decade as a Financial Analyst, before spending the last 7+ as a SAHM to three little ones. She shares simple money tips for moms to help your family reach your financial goals by building a financial plan you can LIVE with! You can learn more about her background in finance, catch her daily on Instagram and Facebook, and her weekly live discussions in her community for Family Finance Moms.

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