PAS Weekly Commentary

2022 Begins with a Huge Jump in Rates & a Growth-Stock Beatdown

The first week of the new year saw heavy selling in the growth stocks, a rotation into value stocks, and a sharp rise in long-term interest rates. The Nasdaq Composite dropped 4.5%, the Russell 2000 dropped 2.9%, and the S&P 500 dropped 1.9%.

The Dow Jones Industrial Average declined just 0.3% after setting intraday and closing record highs -- as did the S&P 500 -- early in the week.

The S&P 500 information technology (-4.7%), health care (-4.7%), and real estate (-4.9%) sectors fell more than 4.5%, while the energy (+10.6%) and financials (+5.4%) sectors rose more than 5.0% and 10.0%, respectively, amid higher oil prices ($78.94, +3.79, +5.0%) and a steepened yield curve.

The growth-stock weakness was linked to the rise in the 10-yr yield, which hit 1.80% on Friday after starting the week at 1.51%. The first 12-basis-point increase didn't deter risk sentiment, though, evident in the S&P 500 setting record highs to start the week and Apple (AAPL) reaching the $3.0 trillion market capitalization.

The persistent advance to 1.80%, however, was unsettling and opened the door for 2.00%. The increased likelihood for a higher interest-rate environment this year contributed to the rotation into value stocks, even after a broad-based decline following the December FOMC Minutes on Wednesday.

The FOMC Minutes showed that participants thought it would be appropriate to reduce the size of the Fed's balance sheet at a faster pace than during the previous normalization period, as well as starting closer to the first rate hike than last time. Part of the reasoning was the economic outlook is stronger and the balance sheet is simply a lot bigger now.

Expectations for a more assertive Fed were supported by the Employment Situation report for December, which depicted a tight labor market with strong wage gains and near-max employment. Nonfarm payrolls increased by 199,000 ( consensus 440,000), the unemployment rate declined to 3.9% ( consensus 4.1%), and average hourly earnings rose 0.6% ( consensus 0.4%).

The CME FedWatch Tool increased the probability for the first rate hike in March to 75.7%, versus 54.0% one week ago. The 2-yr yield, which tracks expectations for the fed funds rate, rose 14 basis points to 0.87%. The 10-yr yield ended the week at 1.77%, or 26 basis points above last Friday's settlement.

Interestingly, the rotation into value/cyclical stocks happened despite the deceleration in the ISM Manufacturing and Services PMIs for December and daily COVID-19 cases topping 1 million early in the week.

On a technical note, S&P 500 closed just above its 50-day moving average (4675) at week's end.

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Past performance is not a guarantee of future results. Indices are unmanaged and one cannot invest directly in an index. Diversification does not guarantee investment returns and does not eliminate the risk of loss.

Data and rates used were indicative of market conditions as of the date shown and compiled by Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions and are subject to change without notice. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer, or recommendation to purchase or sell a security. S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large-cap segment of the U.S. equities market. Each company’s security affects the index in proportion to its market value. NASDAQ Composite Index is a market value-weighted index that measures all NASDAQ domestic and non-U.S. based common stocks listed on the NASDAQ stock market. Dow Jones Industrial Average is a widely used indicator of the overall condition of the stock market, a price-weighted average of 30 actively traded blue chip stocks, primarily industrials, but also includes financial, leisure and other service-oriented firms. Russell 2000 Index measures the performance of the smallest 2,000 companies in the Russell 3000 Index of the 3,000 largest U.S. companies in terms of market capitalization. MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.

Park Avenue Securities LLC (PAS) is a wholly owned subsidiary of The Guardian Life Insurance Company of America (Guardian). PAS is a registered broker/dealer offering competitive investment products, as well as a registered investment advisor offering financial planning and investment advisory services. PAS is a member of FINRA and SIPC.

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2022-131974 (Exp. 04/22)