Categories: Family Office, Financial NewsPublished On: January 28th, 2022Comments Off on Market Update – 1/28/202223.1 min read
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The market remained volatile this week. The S&P 500 fell by more than 4% intraday on Monday, and the U.S. retail investor sentiment index hit its highest level of nervousness since 2013.
In the past two years, the market had formed the illusion that buying the dip will always make money. However, only a few rebounds will be good buying points in the long run, so we usually do not recommend overweighting on dips. It is extremely rare for the stock market to drop 4% on a given day and close positive. In the previous five times this has happened, the following month’s returns were 100% negative. Even three months later, 80% of the time ended in a loss.
On Wednesday, Federal Reserve Chairman Jerome Powell expressed his intention to raise interest rates quickly. He re-emphasized that the biggest risk at present comes from inflation, requiring control of consumer demand by raising interest rates to reduce prices.
Some economists are worried that Powell’s attitude on rapid rate hikes would trigger a recession. We recommend watching U.S. 10-year and 2-year yield spread, which had turned negative before all six recessions since 1980 (2-year yields higher than 10-year yields). The current spread is 0.63%, which is likely to reverse if the interest rate is expected to be raised four times for a total of 1% this year, possibly heralding the next global recession.
The Fed’s policy may change at any time depending on economic and market conditions. For example, the 2018 market crash triggered a change in Jerome Powell’s attitude towards interest rate hikes. Currently, the Fed has enough confidence that it can raise interest rates to control prices without triggering a recession. But the Fed could suspend rate hikes at any time when the market slumps to the point where it could trigger recession fears. This is the reason we emphasize the need for a portfolio, rather than an all-in and all-out strategy.
China’s CSI 300 Index has fallen more than 20% from its highs and entered a bear market, a departure from the bullish expectations of many analysts earlier this year. Chinese assets can be used as part of the global financial asset allocation, but any single concentrated investment will be subject to high volatility risks. It should not be assumed that other countries, including China, will be profitable because the U.S. market has fallen.
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