Market Update – 1/21/2022

The stock market continued to fall this week. The Nasdaq composite index fell by more than 10% from its November record high. Inflation and interest rate hike expectations are certainly some of the reasons for the downturn, but the biggest issue is high valuations.

Although the media has been reporting that technology stocks are underperforming, the real underperformers are speculative stocks that are currently unprofitable and overvalued. Tech stocks with stable earnings and reasonable valuations remain less affected.

CNN’s Fear and Greed Index shows that the market has changed from “greed” to “fear.” The American Retail Investor Sentiment Index released by the American Association of Individual Investors (AAII) shows that retail investors are the most nervous they’ve been since mid-2020, which typically indicates that the market will not have an immediate and large decline. As such, a gradual adjustment to a defensive asset allocation is far more appropriate than holding 100% cash.

The People’s Bank of China cut interest rates for the first time in nearly two years, which will help boost domestic demand. It is also expected to lower mortgage interest rates to boost housing demand.

If the US raises interest rates and China lowers interest rates simultaneously, the US dollar may reverse and strengthen relative to RMB in the future. If you are an investor who holds RMB and has demand for US currency, you can start preparing for the exchange now.