Feb 15, 2022 | insights

Tenet’s Monthly Investment Commentary – February 2022

Monthly Market Update - February 2022

After a strong end to 2021, the market was officially on a wild ride for the first month of 2022, experiencing volatility that we have not seen since early 2020.  January ended with declines in all major US indices.  The S&P 500 closed was down 5.2%, making it the worst month since the 12.5% loss in March of 2020 as well as the largest January decline since 2009. The Nasdaq Composite finished strong as buyers emerged to end the month, but it still ended down 9% for January.  Just like the S&P, this was its worst month since March 2020.  The Dow Jones Industrial Average was the only “bright spot” of the three, dropping 4.3%, which was mainly due to the index’s lower exposure to Technology and growth names.  Outside of US markets, international stocks (represented by the MSCI ex-USA Index) ended January down 3.7%. 


As we look forward to the rest of February and beyond, here are some of the main areas we are watching:

Interest Rates & The Fed
The Fed recently indicated that it will likely start raising rates in March to combat historically high inflation. That would be the central bank’s first-rate hike in more than three years. Markets are now considering as much as five rate hikes this year. While the markets are pricing in this level of rate hikes, it is still possible that inflation naturally cools off, making it necessary for only 1-2 increases in 2022. Even without Fed intervention, Treasury yields have already increased substantially since last year, particularly on the short and intermediate portions of the curve. Recently, the 10-year Treasury surpassed 2%, which was the first time since 2019.


Inflation
You can’t talk about the Fed and interest rates these days without talking about inflation.  This continues to be the primary economic concern with prices of goods and services still rising rapidly.  Most recent data for January showed a 0.6% increase in CPI, resulting in a 7.5% annual inflation reading, which was higher than the estimate of 7.2%.  Wages are also adding to these pressures as January saw a 0.7% increase month-over-month, the fastest pace since December 2020.  With COVID continuing to be a factor, supply chains are also still disrupted, and some believe that these issues will persist throughout 2022.  Contrary to that belief, the new Global Supply Chain Pressure Index indicates that while pressures remain high, they appear to have peaked and may be starting to moderate. 


US Consumer & Jobs
The consumer has been challenged lately due to red-hot inflation, with higher prices forcing Americans to decide whether to spend or save.  Depending on how long inflation persists, and what the Fed decides to do with interest rate hikes, we may see a cooldown of the elevated spending practices that we saw in 2021.  With that being said, the consumer has remained resilient, supported by strong retail sales and higher wages.  The job market also remains strong with unemployment at 4% and payrolls increasing steadily.  The most recent nonfarm payrolls report showed a whopping 467,000 gain, well above expectations of 150,000.  While this data is positive for economic growth prospects, it could also be perceived as “negative” since it may increase the likelihood of Fed rate hikes.


Corporate Earnings
Corporate earnings have remained robust with revenues at record highs and over 78% of companies beating analyst expectations thus far.  It bears watching that companies have only been beating analyst expectations by an average of 5%, compared with 16% the last five quarters.  Expected earnings for Q1 have also been declining; however, estimates for Q2 and Q3 have risen slightly, and earnings growth for the year is still expected to be a solid 8%.  With that being said, profit margins could be negatively impacted this year depending on continued supply chain issues and rising wage costs.

Valuations / Growth vs. Value Stocks
Even with growth stocks (mainly the Tech sector) dropping substantially to start the year, valuations remain elevated compared with historical measures.  The S&P 500 Forward Price-to-Earnings (P/E) ratio stands at approximately 20x vs. nearly 17x for the 25-year average.  In other words, US stocks remain expensive overall. To dig a bit deeper into the source of these higher valuations, we can compare Growth versus Value stocks. For the S&P 500, there is a large disparity in P/E ratios, with Value stocks trading at 16x while Growth is over 27x. While this cheaper valuation may seem intriguing to consider a rotation towards Value, a blended approach is most balanced and tends to provide the “best of both worlds.” For example, sectors such as Technology, Communication, and Industrials all tend to correlate closest with changes in Real GDP, while Financials benefit from higher interest rates. Additionally, the total return of a blended approach has been historically higher compared to Growth and Value, while the Sharpe Ratio (which measures how much return you receive for the level of risk you take on) has also been higher and nearly the same as Growth stocks.


Importance of Staying the Course & Being Well-Diversified
With volatility making a comeback this year, it is even more important to have a well-diversified portfolio.  Time and time again, there is evidence of diversified portfolios helping to reduce risk, maintain returns, and potentially recover quicker from downturns.  Let’s take a recent example illustrated below: when the pandemic began.  Markets saw a steep drop in March 2020 followed by a recovery over the following several months.  When compared to major equity indices, the diversified 60% equity, 40% bond portfolio fell the LEAST when the drawdown began and then recovered QUICKEST as the markets recovered.  Additionally, when analyzed over a longer timeframe, the sample 60/40 portfolio [DA1] had the lowest risk (as measured by standard of deviation) while achieving an annualized return of nearly 7.7% over the last 10 years. Staying invested and diversified isn’t always easiest, or the most fun, but it can produce results and a smoother ride along the way!


Sources:


Registered Representative of Sanctuary Securities Inc. and Investment Advisor Representative of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. Advisory services offered through Sanctuary Advisors, LLC., a SEC Registered Investment Advisor. Tenet Wealth Partners is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC.


The information provided in this communication was sourced by Tenet Wealth Partners through public information and public channels and is in no way proprietary to Tenet Wealth Partners, nor is the information provided Tenet Wealth Partner's position, recommendation or investment advice. This material is provided for informational/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Investments are subject to risk, including but not limited to market and interest rate fluctuations. Any performance data represents past performance which is no guarantee of future results. Prices/yields/figures mentioned herein are as of the date noted unless indicated otherwise. All figures subject to market fluctuation and change. Additional information available upon request. The “Sample Diversified Portfolio (60/40 Allocation) is comprised of the following total return indices and allocations: 40% S&P 500, 3% S&P 400, 4% S&P 600, 15% MSCI EAFE, 5% MSCI Emerging Markets, 40% Bloomberg US Aggregate Bond.