Making sense of the recent market downturn:

US stock markets have had a tough month of January. In fact, the worst start to the year since the financial crisis.  The main drivers of this negative sentiment are rising inflation and the rising interest rate regime expected throughout 2022.

From commodities to shipping costs and used cars, most items and services increased in price last year and continue to do so. Supply chain constraints have also resulted in empty shelves and slow deliveries of goods.  The US Federal Reserve has recognized these risks and has decided to act when it became clear that inflation would be slow to fade.  Late last year, it signaled the end of asset purchases and the gradual increase of interest rates throughout the year.  The earliest rate hike is expected to occur in March and some analysts have penciled in four or more rate hikes this year, which is an increase from the two to three that were expected. The belief is that the central bank needs to be aggressive in order to rein in inflation which in turn could hurt the economy.

These two factors have resulted in an explosive mix which has dented investor sentiment. The last time the US central bank aggressively hiked rates in 2018 led to a brief bear market.  The most elevated parts of the market such as so-called bubble stocks, concept finance or SPACs sold off heavily to start with and then reached most segments of the market. The declines should continue in growth stocks in favor of more attractively priced value stocks. A rotation which could continue at least until the second-rate hike anticipated by the middle of the year.