The Week In Markets – 3 January – 7 January

The start of the year is often a time for new beginnings, with many of us setting resolutions for the year ahead. The history of this age-old ritual can be traced back some 4,000 years when the ancient Babylonians would make promises to their gods at the start of the new year (which was actually in March!). Today, these resolutions we make are not always to the gods, and evidence suggests we find it hard to stick to them, with most people giving up on their objectives within the first six weeks of the year.

The opening week in investment markets has been particularly volatile, and one must wonder what sort of New Year’s resolutions the US Fed made. The release of the Fed’s December meeting minutes highlighted that the members had become more concerned about the persistency and elevated levels of inflation and that “it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated”. The words were enough to send equity markets into a tailspin, with the US hit particularly hard this week. Markets such as the UK and Europe, which have lagged the US considerably over recent years, have outperformed this week. These markets have higher exposure to sectors such as energy, mining and financials which typically perform better in inflationary environments.

Tesla, one of the most heavily debated stocks in the investment community, caught the eye this week. It announced Q4 sales on Monday and beat expectations by around 40,000 vehicles. Interestingly the Tesla Model 3 was the second most popular new car in the UK last year, only to be outsold by the Vauxhall Corsa. The sales beat by Tesla was enough to send the share price up around 13% on the day, increasing Elon Musk’s net wealth by $32 billion on Monday. However, the auto-company was not immune from the week’s volatility, giving back most of Monday’s gains by Friday. 

It wasn’t just equities that have had a difficult start to 2022, with bonds also selling off on the back of the meeting minutes. Investors have now priced in interest rates moving up quicker than previously anticipated and bond yields have risen accordingly. As investors, we have been trained that government bonds act as good diversifiers to equities and while this is true over the long-term, there can be shorter-term periods where the correlations between these assets’ breakdown. 

Today’s US Non-Farm Payrolls data showed 199,000 jobs were added to the economy last month. The number was below expectations, with the rise of Omicron cases likely to have impacted the ability to hire in December. The US employment market remains healthy with job openings at elevated levels. Indeed, the US consumer enters 2022 in a very strong position, benefitting from high savings, strong house prices and rising wages. 

The big falls this week in equity markets have largely occurred in the companies that have performed very strongly over recent years. It’s a reminder that we shouldn’t simply chase last year’s winners. There are a variety of studies that have shown chasing performance rarely works, although it is hard to avoid the behavioural pitfalls that so often draw us to these names. For us it is about balance, ensuring our research process captures more than just past performance. We must also be willing to make some difficult decisions and invest in areas of the market that have been weak but may offer exceptional value going forward. Volatility, while unsettling at times, can present investment opportunities for long-term investors, which we must not overlook.

As we head through the year it will be interesting to see if the markets apparent New Year’s resolution of rotating out of previous winners will last longer than six weeks.

Andy Triggs | Head of Investments, Raymond James, Barbican