2021’s global equity rally ran out of steam as the calendar turned.
U.S. stocks briefly entered official correction territory in January, down over 10%, but recovered some ground in the final week.
Acknowledgement of rising interest rates drove a reassessment of many companies with high valuations. Deleveraging from hedge funds and retail investors also played a role, as did geopolitical concerns regarding Russia. The decline was sharp and swift, which in our view is more characteristic of a typical correction than the end of a bull market.
Diversification Helped Buoy Portfolios
Diversification at the asset class level was rewarded. International stocks held up better overall. The US aggregate bond market fell 2%, which qualifies as a dramatic month in the fixed income world but was still mild compared to stocks. Bond yields on the shorter end of the curve have adjusted to compensate for a series of anticipated rate hikes. Within US stocks, breadth continues to narrow. Mega cap tech as a group performed similarly to the overall US market while much of the rest of the growth universe experienced sharp declines, as did many small cap stocks. Earnings overall have been strong, helping spur the late month recovery, but there has been low tolerance for misses. Several companies that have disappointed have seen large share price drops and this pattern has begun spreading to larger and larger stocks.
COVID Presents Continued Risk
Omicron continues to drive record numbers of Covid cases and more deaths than many appreciate. In areas where the variant spread early, case rates are already in rapid decline, but much of the world is still on the upswing. Covid fatigue has many nations and states reducing restrictions and it is likely the economic impact will continue to wane. Despite this growth driver, we suspect many investors are now largely ignoring Covid and some may be anticipating benefits as restrictions are lifted, suggesting Covid may present more of a risk than an opportunity.