The Word from Main Street

Market Update for the Week of January 17, 2022

ClearBridge Investments believes that 2022 is a year of transition during which inflationary pressures will begin to moderate and transition toward the Fed’s 2% target. Below is a summary of the most recent Recession Indicators report:

Key Takeaways:
According to Jeff Schulze, CFA, Director & Investment Strategist with ClearBridge Investments:

+ ClearBridge expects more volatile equity (stock) markets with more muted returns than the last two years as the macro environment undergoes a shift in terms of phase of the economic cycle, the pandemic, monetary policy and fiscal stimulus.

+ Inflation will likely get worse over the next few months as easy comparisons from a year ago are lapped, but should improve later in 2022 when comparisons become more challenging. Despite an unprecedented set of reasons for prices to soar, longer-term inflation expectations remain muted.

+ Although the current cycle could run hotter and shorter than past recoveries, the near-term prospects for a recession remain muted. Despite two negative indicator changes, the ClearBridge Recession Risk Dashboard continues to flash an overall green signal (see below).

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Source: ClearBridge Investments

Almost halfway through the month of January and the S&P 500 (SPX) is down -0.84% (through 1/12/22). The old market adage "as January goes, so goes the year” suggests that the first month of the year has a way of foreshadowing the performance of the year as a whole. This is called the January Barometer. The idea is that if January brings a gain for the market, the rest of the year will follow suit and end in positive territory. If the market is down for the month of January, the adage warns a loss for the year as a whole is likely. The adage hasn’t held true the last two years as the S&P 500 was down -0.16% in January 2020 and -1.11% in January 2021, but ended both years with a gain. In 2019, the S&P 500 gained 7.87% in January and gained about an additional 21% to finish the year up 28.88% (source: Nasdaq Dorsey Wright).

There is research to support the January bias using historical data going back to 1950. Below are some of the more relevant bullet points.

January Barometer Stats (source: Nasdaq Dorsey Wright):

+ When the S&P 500 records a gain in January, it has recorded a gain for the full year 88% of the time (38 out of 43).

+The average return for years starting with a positive January is +16.64% for the year.

+ When the S&P 500 is down in the month of January, it has finished down for the full calendar year 48% of the time (14 out of 29).

+ The average return for years starting with a negative January is -1.13%.

+ The barometer has been “right”, either to the upside or downside, about 72% of the time (going back to 1950).

+ There have been 12 “really wrong” years in which the S&P 500 has logged a gain or loss of more than 5% in the opposite direction of January's return.
While the adage has an attractive success ratio, it is certainly not fail-safe. In fact, 7 of those 12 years in which the barometer has been “really wrong” have occurred since 2009, including 2014, 2016, and 2018. In 2018, the S&P 500 started off strong, gaining 5.82% in January, but finished the year down more than 11%. Back in 2016, the S&P 500 fell more than 5% in January, the seventh-worst January on record since 1950, before rallying to finish the year with a gain just shy of double digits. The other most recent large discrepancies between January and full-year returns occurred in 2009, 2010, and 2014. Another point worth noting is that the January Barometer has been far better at predicting positive years than it has been in predicting losers (source: Nasdaq Dorsey Wright).

The image below depicts the past 73 years of data for the January Barometer. Keep in mind that these historical tendencies are just that, tendencies, and should not serve as a primary indicator for anyone looking to tactically manage market risk.

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Source: Nasdaq Dorsey Wright

Below are the graphs and information from the most recent COVID-19 Tracker provided by First Trust Advisors.

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Source: First Trust Advisors

 1-17 Pub School.jpg

Source: First Trust Advisors

1-17 Vacc.jpg

Source: First Trust Advisors

 1-17 Deaths and Hosp.jpg

Source: First Trust Advisors

 1-17 Fatal.jpg

Source: First Trust Advisors

 1-17 US Hosp.jpg

Source: First Trust Advisors

 1-17 Variant.jpg

Source: First Trust Advisors

A new study led by Imperial College London researchers found that high levels of pre-existing T cells, created by the body when infected with other human coronaviruses like the common cold, can protect against COVID-19 infection (source: January 10th, 2022). A CDC study of 915 adolescent patients hospitalized with COVID-19 found 83% and 88% of patients aged 5-11 and 12-17 years, respectively, had one or more underlying medical conditions, and approximately two-thirds of patients hospitalized for COVID-19 aged 12-17 years were obese (source: December 31st, 2021).

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Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.
Past performance is no guarantee of future results. All investing involves risk including the loss of principal. Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.
Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future. Nasdaq Dorsey Wright developed the indicators described above. They have been prepared without regard to any particular investor's investment objectives, financial situation and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this report without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions.
Any statements nonfactual in nature constitute only current opinions and interpretations of their indicators, which are subject to change without notice. There may be instances when fundamental, technical and quantitative opinions may not be in concert. Any opinions expressed or implied herein are not necessarily the same as those of Wells Fargo Advisors or its affiliates. Any market prices are only indications of market values and are subject to change. The material has been prepared or is distributed solely for informal purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Data and opinions are current as of 1/14/22. Additional information is available on request.
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