Global equities opened the new year in a bearish tone as investors digest news from central banks. Regulators are getting increasingly nervous about rising inflation that is slowly becoming a political problem, let alone an issue for economists and analysts.
Inflation keeps on rising in key markets
Earlier this week, the Consumer Price Index (CPI), the key metric that gauges inflation in the United States, came in at 7% for the month of December. This is the highest print seen since 1982. Inflation in the Euro Area is expected to be 5.0% in December 2021, up from 4.9% in November. Statistics like this are prompting central bank officials to start hiking rates to slow down the economy.
In light of the growing prices, the US Fed already started to taper in November 2021, when it committed to start decreasing total purchases by $15 billion a month, from $120 billion to $105 billion. A month later, the Fed decided to double the pace at which it tapers from $15 million to $30 billion. And now, the central bank is expected to "retire" its money-printing machine in March this year.
Moreover, the Fed signaled it will hike interest rates three times this year, although economists at the global investment bank Goldman Sachs believe the central bank will be forced to hike 4 times this year. And higher interest rates are pushing bond yields higher with the benchmark US 10-year yield soared in the first week of 2022 to hit a 2-year high.
What does this mean for the stock market?
As we could see from the selloff in stocks that marked the first few days of 2022, investors tend to pare riskier assets, like high-growth tech stocks, when the yields are rising. On the other hand, the value and quality stocks are rising.
Here are few expectations:
The so-called growth-to-value rotation is expected to continue taking place in 2022 as the Fed increases its reference interest rate.
Growth stocks will likely suffer more while more defensive-oriented sectors, as well as cyclical parts of the market, will benefit.
Sectors expected to benefit the most are Energy, Financials, and Healthcare.
JPMorgan's top quant Marko Kolanovic advised clients earlier this week to buy the dip as equity markets can handle higher yields. Still, he reiterated his earlier stance to focus on cyclical and value stocks, and less on more expensive tech stocks.