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JAN. 21, 2022

Where Do We Go From Here?

Given the recent volatility in equity markets, we think it would be helpful to shed some light on the latest developments during these crazy times.

The year has begun with strong news flows: on Friday 10 January, the Bureau of Labor Statistics released the Consumer Price Index at 280.192, with a YoY percentage change of 7%, the highest since 1982. Such a big jump in inflation is partially attributable to the large inflows from the various fiscal stimulus measures in the first half of the year in the United States and to the global supply chain disruption in the second half of the year.

What seemed in June a transitory spike in inflation, due to the basis effect and fueled by revenge spending, became scarier towards the end of 2021. The message of the Federal Reserve changed dramatically, from the September rhetoric of inflation being transitory and the importance of keeping an easy environment to exactly the opposite: monetary tightening is coming. The market is now bracing for three or four 25bps rate hikes in 2022, the first one as soon as March.

The effect of this policy shift is spreading to all major asset classes and in particular to equities, that have been tumbling since the beginning of the year: the S&P 500 Index is on its way to the third negative week in a row. At the same time, the current rate situation is fuelling the rotation out of growth names, such as technology and healthcare and into value names, such as energy and financials. The technology heavy Nasdaq Index is off to its worst start of the year since 2008. On the other hand, the best performing sectors in the S&P 500 YTD are Energy, Financials, and Consumer Staples.

Outflows from growth sectors have been accelerating during these first weeks of the year: year to date ETF flows data list among the top 10 redemptions the Invesco QQQ Trust (a very popular ETF that tracks the Nasdaq 100 Index) and as the top bought ETF, the Financial Select Sector SPDR ETF.

The market is pricing for doomsday but we do not agree. The current rate environment should continue to favor value and cyclical names, and we do not see a trend reversal in that sense until there is some stabilization in interest rates expectations. At the same time, however, growth names are approaching the oversold territory and could turn into buying opportunities as soon as volatility dampens.

We thank you for the continued support.

The FAM team