A Wave of Extremes

The stock market was nothing short of volatile during January. The first of eight Federal Reserve meetings reengaged conversations of interest rate hikes expected this year to combat rising inflation. US equities wavered in response, nearly hitting a 10% drop constituting a correction, in late-January. Similarly, the Nasdaq Composite finished the month down 9%.

In fixed income, the US 10-Year Treasury yield increased slightly to 1.79%, challenging bondholders as yields and prices move inversely. Looking ahead, all eyes are on the Fed as investors await the likelihood of March interest rate hikes, while closely monitoring employment, inflation, and earnings data indicators.

Our Perspective

While headlines are raising concerns, we’re not altogether surprised by the choppiness and have been communicating for months that risks are beginning to rise. The Federal Reserve has further outlined its plan for increasing interest rates, the government’s pandemic-induced stimulus packages have mostly expired, and inherently, the economy is showing signs of slowing. None of this news is unexpected.

What we are seeing is the opportunity to be tactical. Earnings season has again been strong, consumers are still spending, and it appears as if supply chain hurdles may finally be easing. There’s a plethora of factors influencing the currently volatile state of financial markets, and we believe in letting our time-tested processes analyze each factor. And we stand ready to capitalize on value when it presents.

Patience Over Panic

The market overcame various adversities to end the year—see Omicron variant—and ultimately hit an intraday all-time high on New Year’s Eve. Fast-forward a (turbulent) month, what’s happened?

Unrealistic expectations and elevated valuations, paired with rising inflation and interest rates, are creating a perfect storm.

Our Perspective

Our macroeconomic analyses of conditions and bottom-up processes prompted a reduction of risk to more balanced levels in our multi-asset class portfolios throughout the course of last year.

Since a storm-like correction has been on our radar, our approach remains dedicated to evaluating opportunities and adding value when appropriate. Although the recent dip reached correction territory, we do not yet believe we are at the point to make significant portfolio changes.

We share more thoughts on the recent volatility in the blog post, Staying Patient During This Year’s Rocky Start.

One Last Boom

Ideally, the economy would perfectly recover from the pandemic-era with little faults, but that isn’t realistic. The reality is rising inflation and wages with a labor force that has both changed and shrunk since two years ago.

Younger generations recognized an opportunity to move on from unfulfilling careers, with the support of unemployment insurance and stimulus checks – an interesting socioeconomic story. However, the generation causing economic strain is the Baby Boomer generation’s decision to accelerate into retirement.

Our Perspective

Two immediate consequences of this movement are the reducing of GDP potential and the pressure on elderly entitlement programs they support. Our top-down investment groups are closely and continuously monitoring structural economic shifts. We believe demographic challenges, including the above shift, as well as high debt levels, will contribute to a slowing of the economic recovery.

Read more in the blog post, Inflation and the Great Resignation.

Our View
Economic Cycle		Growth remains robust, and we believe the economy is moving into a later cycle; many countries are now lapping their massive fiscal spending programs, causing the massive liquidity tailwinds to begin to dissipate
Stock Market		US stock market volatility has picked back up and equities are now somewhat below all-time highs; valuations are still elevated and there are a variety of rising risks that warrant monitoring
Bond Market		Interest rates have risen well off their lows reflecting shifting expectations on inflation, growth, and central bank policy; corporate and municipal bond credit spreads remain historically tight
Foreign Exchange		While we believe the dollar may weaken longer-term, in the short-term, it is difficult to make the argument that currencies will swing significantly
Important Issues on the Radar		COVID-19: the worst of this economic crisis is behind us, and with multiple waves of the virus, including the Omicron variant, the attention is shifting to vaccine efficacy and distribution; potentially impacting recovery, financial markets and currencies regionally
		Trade Tensions: relations are in structural decline as China focuses on becoming a self-sufficient, global hegemon, potentially impacting global trade and supply chains
		China Credit Cycle: China is furthest along in its economic cycle; policy tightening may act as a headwind to growth; Evergrande is a major issue
		Inflation vs. Deflation: the significant demand shock and remaining economic slack are disinflationary broadly, but certain bottlenecks are sparking some transitory inflation issues near-term

Sources: Wall Street Journal, Refinitiv.

All investments contain risk and may lose value. This material contains the opinions of Manning & Napier, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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