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February 2022 Market Commentary: Is Powell Done Raising Rates?

January Recap and February Outlook

The market adage is “as January goes, so goes the year.” Is it true? According to an analysis by Fidelity, January returns are positive about 75% of the time the full year turns out positive.

The rally was certainly a relief after last year’s dismal performance, and while stocks and bonds are still positively correlated, the return to solid bond performance at least means the 60/40 has a chance of righting the ship.

But the data continues to be open to interpretation. Strong economic indicators like employment, a better-than-expected earnings season, and consumer spending don’t seem to match up to the very rapid change in GDP expectations.

The Federal Reserve recently increased the key short-term rate by 25 basis points, which is a return to more normal behavior of making smaller, incremental changes to fine-tune the economy.

However, the comments of Federal Reserve Chairman, Jerome Powell, at the press conference following the meeting suggest that the Fed may continue to raise rates for an extended period. The recent strong job growth and easing inflation may give Powell room to allow the rate hikes to work through the economy, but there is still uncertainty and volatility is likely to continue.

Equity Markets in January

  • The S&P 500 was up 6.18%

  • The Dow Jones Industrial Average gained 2.83%

  • The S&P Mid-Cap 400 returned 9.14%

  • The S&P Small-Cap 600 increased 9.40%

Source: S&P. All performance as of January 31, 2022

January saw eight of the eleven S&P 500 sectors up and Consumer Discretionary in the lead, up 14.99%. Earnings season has so far outperformed, as of 170 issues reporting, 119 (70.0%) of them have beaten earnings and 107 of 169 (63.3%) beat expectations on sales. Q4 earnings are expected to post a 2.7% gain over Q3 2022 and be down 8.8% over Q4 2021.

Bond Markets

The 10-year U.S. Treasury ended the month at a yield of 3.50%, a decrease from 3.88% in December. The 30-year U.S. Treasury ended December at 3.63%, down from 3.97% last month. The Bloomberg U.S. Aggregate Bond Index ended January with a return of 3.08%. The index continued the trend of positive correlation between the equity and bond markets.

The Smart Investor

The word for this year is patience. A strong January makes a good start to the year, but volatility is likely still in the offing. Until the terminal rate for the Fed is clearly in view, markets will react to ongoing data.

The Fed’s March meeting may provide some clarity, but Powell has been very consistent in his ongoing fear that pausing – or reducing – rates too soon could result in inflation remaining too high. A booming job market cushions the economy but makes the job of the Fed far more difficult.

Here are a few things to think about:

  • Diversification remains a challenge. Ensuring that your portfolio is adequately diversified by adding non-correlated assets can help smooth volatility

  • Timing an entry or an exit is very difficult to pull off successfully. There may be some false starts before a recovery gets fully underway. Recouping portfolio values from last year’s losses will require positive performance, and you don’t want to miss any of it

  • You can make a 2022 IRA contribution until April 18, 2023, but it’s a good idea to start your tax planning early

A big-picture focus can be valuable in your financial planning and in your investment strategy. Things are getting better, even if the road looks bumpy. Stick to your long-term plan, and avoid trying to time the markets as get to the home stretch on this Fed rate cycle.


The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

This content not reviewed by FINRA


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