Schwab Market Perspective: Slipping Gears

In recent weeks, it has felt like the U.S. stock market slips a gear every so often, dropping sharply as investors search for traction in uncertain terrain. Many of the individual stocks in the major U.S. stock indexes are down 20% or more from their peaks this year, creating the equivalent of a stealth bear market, even if the indexes themselves haven’t hit that point. At the same time, investors are bracing for the Federal Reserve to start raising interest rates in March. Other major central banks are already doing so, representing a remarkable policy shift from only a few months ago.

From a global perspective, although investors generally believe rising U.S. rates often lead to a downturn in emerging-market stocks, that isn’t always the case. Meanwhile, the tense Russia-Ukraine situation has affected the Russian stock market, but if history is a guide, the impact is unlikely to spread.

U.S. stocks and economy: Stealth bears lurk

Economic data has been murky lately, although it should become clearer moving forward, as the worst impacts from the COVID-19 omicron variant continue to fade. In the near term, we are still grappling with some distortions, including weakening consumer spending, and the most rapid inflation we’ve seen since the 1980s. The picture is further complicated by the Federal Reserve’s plans to begin raising short-term interest rates.

Among the murkier recent economic reports was the January jobs report. Total job growth surged beyond expectations, the prior two months’ job gains were revised upward and the labor force participation rate increased. However, omicron dealt a large hit to the average number of hours worked—which fell to the lowest point since April 2020—and the number of people calling in sick rose to a record 3.6 million.

Omicron led to fewer hours worked and rising illness reports

Source: Charles Schwab, Bureau of Labor Statistics, Bloomberg, as of 1/31/2022.

In response to the apparent tightness in the labor market, investors now expect the Fed to be more aggressive in raising interest rates. Not only are five hikes now expected this year—in addition to the Fed beginning to shrink its balance sheet—but there is growing talk the Fed might raise its benchmark rate by half a percentage point in March, instead of the quarter point previously envisioned.