Summary of Q1 2022 and Q4 2021 January 21, 2022
Will Q1 give us stellar returns?
Q4 of 2021 saw a strong ending. So will Q1 2022 be another bullish quarter too? Here, we will recollect some important episodes from Q4 2021 and point out some events that are important in Q1 2022.
Looking back at Q421
Q4 2021 was an eventful quarter with market moving events and economic data points that came in at record levels.
The market was supported by strong fundamentals and strong corporate earnings, though supply chain disruptions tamed the forward guidance of many companies. However, with the discovery of a more contagious COVID-19 variant, Omicron, and the Fed’s pivot to a more hawkish stance amid record inflation figures, saw the market retreat initially and trade at an elevated volatility level before the famed Santa Claus rally towards the end of the year.
The charts below show all three indices started the quarter on a bullish note and traded to record levels, but retraced during November. The selling pressure intensified after the discovery of the Omicron variant, and was made worse by the hawkish tone of the Fed. However, the market bottomed and started climbing at the start of the last trading month.
Below are some of the key market moving factors of Q4 2021:
Omicron variant of COVID-19
Nothing seemed to be able to stop the bullish sentiment of the market till the discovery of the new COVID-19 variant – Omicron. The Omicron curveball resulted in the three major indices dipping more than 2%, with the Dow Jones Industrial Average briefly falling more than 1,000 points a day after Thanksgiving.
The variant ,which was first discovered in South Africa, soon began to spread across the globe, and the World Health Organisation soon categorized it as a “variant of concern”, which is traditionally for variants that are thought to be more contagious and have a certain resistance against currently available vaccines.
In keeping with initial reports, the Omicron variant quickly became the dominant one in numerous countries with many experiencing a resurgence in COVID-19 cases. This was in addition to the current Delta variant. As a result, cases soon exceeded the numbers reported during the pandemic’s highest point. Investors feared that the new variant could cause another series of lockdowns, especially during the festive season, which would dampen economic activities.
The contagion fear caused a series of selloffs in the market in the days following the initial discovery of the variant.
However, the market rallied, tempered by signs of milder illness caused by Omicron1. Though it was still not clear if the new variant was more or less dangerous than previously perceived, the market rallied anyway, perhaps supported by strong market fundamentals.
The rally may set the tone for a strong start this year though risks of the Omicron variant are still to fully dissipate, and the rally could still be threatened by any negative developments in the pandemic.
From the pandemic lows, the market rebounded back strongly and quickly thanks to the Fed’s generous injection of huge amounts of liquidity into the US economy. With the Fed’s support, it ended the shortest bear market in history and the policy tools for economic recovery were kept in place to ensure that the economy went back to pre-pandemic levels. Investors cheered the supportive monetary policy and the Fed’s dovish stance.
The Fed’s supportive stance however changed to a slightly hawkish tone when the Fed’s Chair Jerome Powell testified in front of Congress in November.
The “once-thought-to-be-ever-dovish” Powell retired the word ‘transitory’ and cautioned that perhaps it is time for the central bank to dial back on the quantitative easing.
The initial market expectation was for the tapering to be at USD$15 billion each month, which would end the bond-buying program in June 2022. However, as expected after the testimony by Powell in Congress, the Fed announced in its December meeting that it will begin tapering by aggressively dialing back its bond-buying by USD$30 billion each month; double of the initial expectation. As a result, net new purchases of bonds will end by March 2022, which is ahead of the previous schedule. This policy change was in response to the robust economic recovery. Though Powell reiterated previously that the end of the tapering will not necessarily bring forth rate hikes, December’s meeting signals at least three rate hikes in 20222. Though the rate hikes remain to be seen, it is clear that the direction of the central bank is pivoting towards a more normalized monetary policy.
As the economy emerged from the pandemic, it was previously ascertained that the increase in price levels were caused by factors that were transitory in nature. However inflation rates reported consistently rose faster than expected; inflation rose 6.8% in November which was the fastest increase since 19823 Inflation may not seem to be that transitory and may be attributed to more structural factors.
Inflation is rising faster than expected and in turn, fuels an increase in inflation expectations which is self-fulfilling in rising inflation. Surveys conducted reflect that inflation is a key risk that investors are mindful of, and may be the reason for lower stock market returns4. See effects of inflation and how you can position your portfolio to counteract inflation.
With the long-term inflation target of 2%, the Fed is usually more tolerant of a runaway inflation rate. However the current episode of prices rising to record levels are believed to be more permanent in nature, which is forcing the Fed to step in and control the inflation rate.
Expecting contractionary monetary policy and higher inflation expectations, investor sentiment is turning negative due to lower liquidity for economic activities.
Entering into the first quarter of 2022, here are some events worth noting.
March 2022 FOMC Meeting
With the end of the Fed’s bond-buying program in March, the Fed will be able to combat inflation with interest rate hikes. This is because higher interest rates increase the cost of borrowing which is effective in stemming inflation.
Each dot on the dot plot represents a committee member’s views on the desired interest rate level. From the dot plot, we observe that the current interest rate level is far from the desired rate. Since there are projections of 3 interest rate hikes in 2022 from the December 2021 Fed meeting, there is a possibility of the Fed signalling a rate hike in March 2022. Hence, this meeting is deemed as one of the key meetings for market participants.
As the US and China are the two largest economies of the world, the relationship between them is very important. Worsening relations between them can affect world trade due to possible tariffs or even sanctions. With tariffs, the cost of imports increase which ultimately gets translated to higher prices that consumers have to pay. Thus, tariffs could worsen the currently high inflation levels.
The US “boycott” of the Beijing Winter Olympics5, started worsening the US’ already tense relations, and China vowed to get back at the US if it continued with the boycott . At the time of writing, China has yet to retaliate. Thus, the first quarter of 2022 is where we get to see the approach that China is taking with regard to the boycott.
2022 Q1 outlook
To conclude, we look at the seasonality returns and we have found that through the last 10 years, January has one of the lowest probability of positive returns. Furthermore, the Dow Jones and S&P500 reached record highs in December 2021 due to strong earnings releases.
With January 2022 lacking earnings to support the market, investors should be wary. For the whole of 2022, investors should keep an eye out for possible black swan events and manage their positions.
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-  https://www.nytimes.com/2021/12/28/world/europe/omicron.html
-  https://www.bloomberg.com/news/articles/2021-12-15/fed-doubles-taper-signals-three-2022-hikes-in-inflation-pivot
-  https://www.cnbc.com/2021/12/10/consumer-price-index-november-2021.html
-  https://www.cnbc.com/2021/12/29/investors-fear-inflation-most-in-2022-and-see-lower-stock-market-returns-cnbc-survey-shows.html
-  https://www.bbc.com/news/world-us-canada-59556613
-  http://www.news.cn/english/2021-12/06/c_1310355095.htm
About the author
Lee Yong Heng (Senior Dealer) & Chan Zi Quan (Dealer)
Yong Heng joined Phillip Securities in June 2020 as an Equity Dealer in the Global Markets Team. He specializes in the US and Canada markets assisting clients and supports the UK and Europe markets. Yong Heng graduated with First Class Honours from Singapore Institute of Management, University of London (SIM-GE) in 2015 with a bachelor’s degree in Economics & Finance. He also completed his CFA studies 2019.
Zi Quan is a US Equity Dealer in the Global Markets Team and specializes in the US and Canadian markets. He is an avid crypto fan and is adept in macro analysis.