The past two years have been pretty crazy in the stock market, and there’s no reason to think that will change in 2022. The Federal Reserve is aggressively tapering to fight inflation, many stocks are still near all-time-high valuations, the stay-at-home stocks are tumbling, cryptocurrency volatility is leaking into equity markets, and the ongoing pandemic is still creating uncertainty for public health and the global economy.
As we try to make sense of all these factors, here are the important trends that should drive the stock market in January.
1. Value stocks will keep up the momentum
As this chart shows, value stocks generated better returns than growth stocks in December, and it seems that the Fed’s latest announcement played a big role in that.
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Last month, the Fed announced its plans to accelerate its timeline for interest rate hikes. Low rates are considered expansionary. They encourage investors to take risk, which tends to move capital into the stock market, disproportionately toward growth stocks. In the past, we’ve seen monetary tightening cause “taper tantrums” — higher interest rates cause capital to flow out of the stock market. This drives prices lower, with growth stocks being hit the hardest.
Eventual rate hikes were inevitable, but we had no idea if they were going to come this year, next year, or sometime even later. Persistent high inflation forced the Fed into a shortened timeline, so the stock market will lose monetary support more quickly than most investors expected. This should have an impact in the short term, and it’s probably going to cause volatility.
Investors aren’t giving up on the stock market, but it looks like they’re preparing for rough conditions. Growth stocks will struggle to find momentum while rates climb, a process that could take multiple years. Investors are likely to favor cheaper, more stable investments in the form of value stocks.
2. Dividend yields will drop — for now
I expect dividend yields to rise eventually as interest rates tick upward. Before that happens, the move into value stocks should drive up prices of stable dividend payers. There’s nothing changing about their profits or payouts, so that should translate to lower yields.
This is already happening. As this chart shows, dividend stocks outpaced the market in general.
This drove dividend yields lower to close out the year.