"On The Markets" for January 2022

Hi, I’m Charlie LaRosa, and here is our take “On The Markets” for January 2022. US equities came under pressure in January as the S&P 500 suffered its biggest monthly pullback since the start of the pandemic in March 2020. Historically, a weak first month hasn’t necessarily led to a year of negative returns. In the past 20 years, the S&P 500 has fallen 3% or more in January on six occasions. Five of those occasions, the S&P 500 was back in positive territory before year-end – the only exception was 2008. Much of the volatility during the month can be attributed to the Fed embarking on a plan to raise interest rates, with a policy statement from the central bank that it could start to do so as soon as March 2022.  Fed Chair Powell’s press conference comments were widely perceived as hawkish, implying that we may see more rate hikes this year than originally anticipated by the markets. The Fed is also in the process of shrinking its record balance sheet at a faster pace through quantitative tightening. While the monetary policy shift was a main focus for the markets, dampened fiscal policy support was another overhang. Sen. Joe Manchin did not support President Joe Biden’s Build Back Better (BBB) plan, which has stalled the proposal, saying that the bill could further fuel inflation. The spread of the Omicron variant played into the more persistent supply chain and input price pressure narrative. While the impacts of Omicron on economic life should diminish through the year, investors remain hopeful that a highly contagious/relatively mild Omicron is a clearing event that helps immunize the population. Health officials have noted that COVID-19 is reaching an endemic phase. While new variants are likely to emerge, society is learning to adapt and accept the possibility that COVID could become a seasonal virus. After several false starts, a rotation from Growth to Value may finally gain traction and provide a tailwind for the appreciation of the undervalued, cash generative entities we favor. Our style should benefit from two themes. First, an inflationary environment favors companies possessing pricing power and significant sunk and/or fixed costs. Holdings including broadband providers, waste handling firms, sports franchises and branded goods companies fit that bill. Second, after years of reinvestment, many formerly disrupted incumbents are poised to innovate their own way to growth. As Value Investors, we continue to navigate the current market volatility as an opportunity to buy attractive companies, which have positive free cash flows, healthy balance sheets and are trading at discounted prices. Please make sure you subscribe to our channel, for all GabelliTV updates. And for more information, visit us online at www.Gabelli.com.


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