The Tribune

By PIERRE VEYRET

Technical Analyst

ActivTrades

The first month of 2022 has been a challenging one for most stock market investors thus far. Bull traders have been disappointed to see significant negative performances on most benchmarks, and across almost all sectors, as global uncertainty rises. The MSCI World index is down -16 percent, the Nasdaq is off by -10 percent, while the S&P 500 has declined by -6.5 percent. Investors’ risk appetite is clearly on the downside. What explains this lack of appetite for riskier assets, and what to expect from stocks further this year?

Where the global uncertainty is rising from

The current risk aversion among most investors can be explained by three major sources of global uncertainty.

First, the most important impact on market sentiment comes from the anticipated ‘hawkish’ policy switch by the Federal Reserve, which recently announced its tapering as well as the prospect of new interest rate hikes. Most investors understood this message as a sign that “the party will end soon” for stock markets, and started to hedge their portfolio with safer havens such as bonds, precious metals, Japanese and Swiss currencies. While some market operators are more focused on the prospect of higher borrowing costs, other investors are even more concerned about the liquidity the Federal Reserve may withdraw this year. Without the artificial support that the Federal Reserve is still providing to the markets, doors to a significant correction will be opened for stocks, especially for extra-stretched valuations such as technology shares.

In addition to the change in monetary policy from the Federal Reserve, equities traders now have to deal with rising geopolitical tensions between the US and Russia over Ukraine. Political pressure and instability in the region are nothing new, but the situation has escalated very quickly over the past few weeks and both belligerents are even considering military moves. Even if this situation should not linger long-term, it still has a great impact on short-term market sentiment, except maybe for energy companies who benefit from rising prices.

Finally, investors are also facing a disappointing earnings season so far. Financial results from large companies across different sectors, such as technology stocks and banks, were uneven. This highlights the fact that the impact from the Omicron variant on economies was certainly greater than previously anticipated. These patchy corporate results confirm the recovery was not as strong as some investors might have thought, which adds to the current uncertain market mood.

What to expect from now on?

Despite the significant bearish risks previously mentioned, the future should not be that dark for the rest of the year on stock markets. First, disappointing corporate results and rising geopolitical tension are seen as temporary, and should not have a major impact long-term. There is even a high chance these were already priced in.

Additionally, technical configurations on most bond markets suggest that a pull-back may happen soon, which should ease the pressure on stocks and prevent these markets from dipping further.

Furthermore, ‘buy the dip’ opportunities are also now rising. Many traders know the overall environment remains strongly positive for stocks, especially when most major central banks are still massively supporting their economies with huge buying programmes. That said, the recent sell-off turned made company share prices’ very attractive.