Wild price swings were the name of the game in January. All major stock indices finished the month in the red, primarily driven by a selloff in interest rate sensitive, growth-oriented tech stocks. The selloff came as the Federal Reserve took a hawkish tone indicating its readiness to tighten monetary policy in an effort to combat red-hot inflation.
With rate increases looming on the horizon, markets are adjusting to the transition in monetary policy. US Large cap stocks reached correction territory intraday (10% drop from its high.) However, they finished the month down 5.2%. US Value stocks and Emerging markets withstood the volatility best, only giving up 1.9% and 2.6% respectively. Speculative pockets of the market such as cryptocurrencies and tech stock IPOs dropped over 20%.
In the bond market, we saw negative returns, a significant yield curve flattening, and widening credit spreads. These are all important to monitor particularly if this flattening continues to the point of inversion or credit markets deteriorate as either one may cause the Fed to alter their tightening course.
Despite the uptick in volatility, market corrections are normal and healthy. They frequently occur during a long-term bull market and are not an indication of an end of a bull market or a recession. In fact, they may offer an entry point for those investors with cash on the sidelines or an opportunity to rebalance your existing portfolio.
As the year progresses, we would expect to see a market pattern with softer returns and larger bouts of volatility but overall remain in a positive uptrend. There will certainly be winners and losers within the broader markets but maintaining a diversified portfolio and diligently rebalancing will help weather any storm.