7 February 2022 - Volatility is here to stay



US equity markets finished higher for the week, during which Nasdaq fell 4% in a single day and Facebook (now called Meta Platforms) lost ¼ of its value in the same day. But superb results by Amazon and Google saved the day and gave the opportunity to buyers to return to the markets, especially in beatendown Growth and Technology names. Chinese markets were closed for the whole week, due to the lunar New Year celebrations missing all the action.


Europe underperformed with small losses, but UK’s FTSE100 bucked the trend because of its composition tilt, namely Energy and Financials, two sectors which rallied last week. Given the situation with Ukraine which seems to be deteriorating rather than the opposite, one should expect increased volatility despite the fact that we are entering a period of traditionally friendly equity markets (Feb.-May). This period is associated with the re-start of the share buybacks by companies providing flows and bids to the markets, while it is also the bulk of the European dividend period.


Central banks turned more hawkish last week. The Bank of England raised interest rates for a second month in a row, by 25bps, although several members voted for an increase of 50bps. A back-to-back increase of rates in the UK has not taken place since 2004, showing that this time central banks are in a hurry to remove monetary accommodation as inflation has stayed higher for longer. The ECB meeting also provided some surprises as it basically accepted the fact that interest rates will have to be increased this year, as the market had been pricing for some time now. Mrs. Lagarde pushed back on the narrative of “wait and see” about inflation as she admitted that the worry about high inflation has become unanimous among the governing council’s members.


EU Inflation moved higher 5.1% in January, exceeding the expectations for a fall to 4.4% after the high of 5.0% in December.


The US labor market continues to show remarkable strength. The January non-farm payrolls were announced at +467`000 vs expectations for just +150`000 and beating the fears for an even smaller or negative number as speculation had been growing due to the Omicron variant which kept thousands of people out of the “official” jobs market. Even more astonishing was the revision to the previous months, as December's small growth of 200`000 payrolls was revised to over 500`000. The unemployment rate ticked a little higher to 4.0% because the participation rate was also higher, meaning that more people are coming back searching again for a job.


The Q4 corporate results in the US are entering their final stage. The lessons learned are that wages` increases are becoming an issue for many companies and profit estimates for the S&P500 are being revised slightly lower for the first quarter. On the positive side valuations have come down significantly in many cases and investors are looking into opportunities, as the examples of Google and Amazon showed. On the contrary, investors are also challenging the business models of powerhouses like Netflix and Facebook, depicting an image of significant slowdown in revenues as well as new members, at a time when expenses are soaring for investments.


The EUR had a major move higher, after the ECB meeting, against most currencies. The EURUSD touched even the 1.1500 level, after testing the 1.1100 level only a few days ago. The volatility in the stock markets has spilled over to the other asset classes as well.


Government bond yields spiked higher, after the Bank of England and the ECB meetings. The US 10-year Treasury yield is trading again at 1.92%, the highest in two years, while the move in the German 10-year Bund is even more dramatic, as it trades at 0.2%, being at - 0.5% just a few weeks ago.



Charts of the Week


The majority of the economists, including those who participate in the central banks’ committees, believe that inflation will fall significantly to levels close to 3% by the end of this year and by 2% in the middle of 2023. This thesis is primarily based on the “basis effect”, meaning that the index in 2022 will be compared with already high numbers of 2021, especially after the summer months, while at the same time supply chain issues as well as the normal fall in demand for heating oil in spring will lower the commodity price inflation. Of course, for now there seems to be no sign of this potential fall, as wages have also started to move higher in the US, but also in Europe, creating further tailwinds to inflation even if commodity prices start to ease. A potential invasion of Russia to Ukraine complicates matters even more.

Our reader must have been accustomed by now with the ongoing Value/Growth debate where Value refers to cheap, low growth companies, usually with high dividends (financials, energy, materials) while Growth refers to relative expensive but high growth companies (Technology primarily). The chart shows the relative performance of the two since `95. Investors who only look at the last 10 years, will realize that Growth has performed spectacularly better than Value (the Value/Growth line continuously going down). However, in the first part of this century (2000-2008) Value was performing much better than Growth, especially after the burst of the 1999 stock market bubble. Value is again performing well since the beginning of the year. Will the relative rally be “short-lived” again as all in 2010-2020, or are we ahead of a major multi-year reversal ?



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