In our early December piece, we wrote “Of greater concern is whether the Fed is making another mistake.” And specifically, “any perceived mistake could result in a significant reduction in risk assets” as “hedge funds are exceptionally good at crowding the exits.” That is exactly how the year began.
A rough start to the year got even worse following a press conference by President Joe Biden whereby the S&P 500 index dropped 6.8 percent over the following three days. That is not a political statement – it is a fact. It is quite clear that the markets did not like his comments that suggested a “minor incursion” by Russia into Ukraine would be tolerated, and that the 2022 elections might not be legitimate.
The S&P 500 index declined 5.25 percent in January having been down more than 11 percent only a week before. The bond market sensing a major mistake by the Federal Reserve regarding inflation saw the 10-year U.S. Treasury yield rise from 1.35 percent on December 3, 2021, to 1.87 percent on January 18, 2022. The nearly 40 percent increase in interest rates over a seven-week period was a catalyst for a selloff in the U.S. equity markets, with the NASDAQ Composite falling more than 15 percent at one point in January.