The S&P 500 index notched up 70 all-time highs in 2021, a record that is second only to 1995.
Australian Share Market (ASX200) – up 0.12%, the third weekly gain in a row. Offshore leads were mostly negative with falls in global tech stocks weighing on key indices. The Energy sector led the gains (+4.27%) followed by Materials (+2.29%, up 7 weeks in a row) and Financials (+2.06%, up 6 weeks in a row). Info tech led the declines (-6.15%) followed by HealthCare (-3.35%) and Telecoms (-2.02%) in a clear growth into value factor rotation spurred on by rising bond yields as the 10 year US treasury yield hit a new pandemic high of 1.77%, the highest since the beginning of 2020 just before the pandemic began. Trading volumes were lighter than usual with many market participants on holidays but some portfolio repositioning very early in the New Year seems to be underway. A large increase in coronavirus cases domestically didn’t bother investor sentiment too much due to the milder symptoms associated with the latest variant although reopening trades were under pressure. Concerns around supply chains re-emerged as large numbers of workers test positive or are forced to isolate as close contacts which risks leaving certain businesses short staffed and some government restrictions we reintroduced.
US Share Market (S&P 500) – down 1.87%, with the Dow (-0.29%) and Nasdaq (-4.53%) also lower for the week. The Energy sector led the gains (+10.61%) on a 5% rally in the oil price. Financials (+5.36%) and Industrials (+0.65%) were the next best. REITs (-5.00%) led the declines followed by Info Tech (-4.69%) and Health Care (-4.65%). Global equity market inflows remined strong despite the historically quieter holiday period with US$25 billion in inflows for the week, after a record US$949 billion in inflows for calendar 2021. Economic data remined strong despite the December non-farm payrolls (+199,000 jobs added) missing expectations that was offset by upward revisions to prior months that saw the US unemployment rate fall to new pandemic low of 3.9%. The US economy added 6.45 million jobs during 2021, the highest number on record for a calendar year. The main story for the week was the higher bond yields and steepening yield curve on hawkish takeaways from the December FOMC meeting minutes particularly around a potential for a faster and sooner reduction in the US Federal Reserve’s balance sheet. The market is now pricing in an 80% chance of a March rate hike, and fully pricing in 3 rate hikes for 2022. The higher rates exacerbated existing valuation concerns in the riskier pockets of growth, tech and longer duration equity plays which came under the most pressure last week.
Microsoft (MSFT) down 6.6% for the week and one of the biggest detractors as it got caught up in the tech selloff. While much of the tech sector weakness of recent months had been in the smaller more speculative end, some of the larger tech companies rolled over last week. With no changes to earnings estimates it looks more like a broader sector derating on higher bond yields than anything else. While not a great start to the year MSFT was up 68% in 2021 providing meaningful positive returns to the equities portfolio.
Bank of America (BAC) hit a 13 year high with Banks seen as key beneficiaries of the higher interest rates and steeper yield curve. BAC has been making efforts to improve revenue growth, strengthen the balance sheet, implement technological advancements across the business and expend into new markets which seems to be paying off, and is also benefiting from the deal making and corporate actions frenzy that looks set to continue in 2022. The last time the BAC share price was at these levels was in late 2007 as the Global Financial Crisis was just getting underway.
BHP (BHP) had another good week up 3% and is now up 25% from the November lows and has recovered half of the heavy the losses from the September quarter when the Chinese economy was slowing much faster than expected, the iron ore price had slumped and property developers like Evergrande were getting into trouble. Since then, the Chinese authorities have stepped up efforts to maintain and accelerate growth and limit any fallout or contagion and the iron ore price has recovered to around US$130 a tonne. With the Winter Olympics starting shortly the Chinese government will want to project a strong China to the world with the outlook for China in 2022 looking encouraging after last year’s issues.
The week ahead
A quiet week for domestic data with retail sales tomorrow and housing finance on Friday but the main focus will likely be on the inflation readings from China on Wednesday and the United States Thursday night. Also Thursday night is quarterly GDP out of the U.K. while Eurozone industrial production on Wednesday night will also be in focus.
Saward Dawson Wealth Advisors Pty Ltd, a Corporate Authorised Representative of Akambo Pty Ltd t/a Accountants Private Advice
The information presented in this publication is general information only, and is not intended to be financial product advice. It has not been prepared taking into account your investment objectives, financial situation or needs, and should not be used as the basis for making an investment decision. Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and financial circumstances.
Some numerical figures in this publication have been subject to rounding adjustments. Akambo Pty Ltd (including any of its directors, officers or employees) will not accept liability for any loss or damage as a result of any reliance on this information. The market commentary reflect Akambo Pty Ltd’s views and beliefs at the time of preparation, which are subject to change without notice.