Despite a fightback in recent sessions, Wall Street suffered big losses at the beginning of 2022, and competing factors are likely to guarantee further volatility in the near term. Our head of markets looks at the major issues driving sentiment right now.
A continuation of the brief relief rally was not enough to repair the damage already wrought by a poor start to the year.
Despite a surge by the Nasdaq tech index, helped along by broker upgrades to the likes of Netflix (NASDAQ:NFLX) and Tesla (NASDAQ:TSLA), as well as some broad bargain hunting, the index recorded its worst January since 2008 and currently stands down 9% in the year to date. A similar picture was seen in the other major indices where, despite some strength, the Dow Jones is down by 3.3% and the S&P500 by 5.2% so far this year.
The competing factors which have so far perplexed investors and ensured volatility are likely to continue for the time being. On the one hand, monetary tightening and geopolitical tensions are unnerving market participants, while at the same time the economic news is providing a recovering and robust backdrop, with corporate earnings also expected to confirm the rude health of companies on the ground.
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Even so, the thought of less stimulus to which the market has become accustomed after years of easing is one which will take some time to process and, in the meantime, is leading to dislocations in pricing.
In terms of interest rate increases this year, for example, opinions are divided on how aggressive the Federal Reserve will need to be. While most expect around four rate rises to be the likely outcome for the year, there are others who expect the inflation targeting to be more pronounced, with as many as seven rises being seen by one market outlier.
In the meantime, there could be an element of a return to bottom-up investing, looking towards companies with defensive qualities, stable cash flow and pricing power as opposed to those which are priced on the promise of future explosive growth.
More broadly, the spectre of rising rates and a surging oil price has resulted in a positive opening to the year for some. The banking sector has seen an early bout of investor interest and with the full-year reporting season yet to come in the UK, there will be high expectations not only for a robust showing, but also for a further return of capital to shareholders in the face of the embarrassment of riches accumulated at the height of the pandemic.
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The easing of restrictions and the diminishing effect of the Omicron variant could also provide some support to the beleaguered travel and hospitality sectors, although the escalating cost of living in the UK could crimp some of this progress. Meanwhile, the UK is currently becoming an interesting investment destination to those investors who have been searching for a source of mature, cyclical businesses with a relatively attractive dividend yield to boot.
As such, the FTSE100 has endured a rather less torrid time than some of its international counterparts and, while an increase of 1.8% in the year to date does not shoot the lights out, it is a creditable performance given the backdrop of general market volatility.
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