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January was a terrible month. Worries about economic damage from the Omicron wave were combined with the Fed’s perceived decision to start raising interest rates based on inflation levels at a 40-year high. Stocks were knocked down around the world. Tech stocks got hit especially hard, but even fixed income was down. It really was a terrible month.
Looking Back
Case growth spike. One of the major concerns was fear that the Omicron wave would derail the economy. Slowing job growth into the end of 2021 had already hit both confidence and consumer spending. The massive spike in new cases in January seemed to suggest the damage would only get worse.
Other reasons to worry. The other big worry was that inflation was still rising and had hit the highest level recorded since 1982. The Fed, already under fire for being behind the curve, signaled strongly that it would begin tightening monetary policy to get inflation under control—starting in March. With a combination of fears about slowing growth and the promise of higher interest rates, the significant market declines made sense.
Positive trends. In good news, the end of January also saw significant changes from the negative trends that knocked the markets earlier in the month. The Omicron wave peaked in mid-month and then started to drop sharply. Case growth ended the month down 40 percent from its peak two weeks earlier.
In February, so far, case growth has dropped another 20 percent from its January peak and looks to be on a steady and steep downward trajectory. If this trend holds, we should be back to the much-lower November 2021 infection levels by the end of this month. By the end of March, case growth should be close to its lows from last year, at or below the levels seen in the last Delta wave. So, January saw both the peak in medical risks—and the start of the turnaround.
Looking Ahead
Economy picking up. There is more good news. The other major concern, that the economy was weakening, was substantially reduced by the latest jobs report in early February. This release showed substantial job gains—much larger than had been previously reported—in November and December, along with much-larger-than-expected growth in January.
Not only did the economy not weaken during the Delta and Omicron waves, it actually picked up momentum. Looking forward, as that momentum combines with normalizing infection rates, we can reasonably expect economic growth to accelerate even further. In addition, confidence and spending should increase with employment. Again, January saw both a peak in worries about the labor market—and a turnaround.
Signals from the Fed. Where are we with the Fed? High inflation and the central bank’s plans to raise rates were a major worry in January, and there we have not seen a turnaround. High inflation rates are still very much with us. And the fact that employment is doing very well raises the chances the Fed will raise rates substantially. Still, looking forward, there are signs that inflation may be peaking. In several of the sectors with the highest price increases, such as used vehicles, the pressure is starting to moderate. There are also signs the Fed is trying to tamp down expectations for rate increases. So, although worries are still high, we might well see them pull back a bit in February.
Cushioned Volatility Likely Ahead
And that is the big picture. Looking back, our worries regarding medical, economic, inflation, and policy risks may have seen a peak in January. Since then, there have been clear signs that several of these risks have come down. Other, preliminary signs indicate the other risks will decline as well. In February, the markets will be sorting out these indicators and trying to figure out whether the risks are truly dropping and, if so, by how much. In other words, we can expect more volatility—but also more cushion under the markets and even the chance of a bounce.
January was a tough month, for good reason. February looks to be, if not a good month, at least one that is less bad. Despite the risks that are still out there, the potential for a good month is very real. In any event, we should see better news overall.
