In a new monthly series, Stockhead discusses the markets outlook with David Jones, Chief Market Strategist at investment platform In his analysis, Jones highlights the key macro trends underpinning markets, as well as specific stocks/sectors to watch.

January was a whipsaw start to the year on global markets, as US stocks posted their worst monthly result since the 2008 financial crisis.

So far, February has only been a rollercoaster – the Nasdaq surged back, before the focus turned to the latest round of big tech earnings reports.

Results have been mixed – in line with more volatile trading trends in a post-pandemic year where inflation is still running hot and interest rates are expected to rise.

In some ways, Jones tells Stockhead, the investor skittishness does seem “a little bit peculiar.”

“Because, we knew, coming into this year that inflation was going to be a problem,” Jones says. “We knew it was going to be stickier than central banks previously thought, and we knew rate rises were coming.”

Rates are manageable 

But despite the Nasdaq mini-rally, “I still think we have quite nervous markets heading into February”, Jones said.

What’s causing the angst? Referring back to interest rates, Jones reckons rate rises themselves are manageable – as long as there’s certainty.

“I think it ties back to investors not quite understanding or appreciating how many rate rises there might be this year,” he said.

As an example, Goldman Sachs recently determined inflation may force the US Fed to hike rates more than four times in 2022.

“At the end of last year, analyst consensus was forming around three rate rises. So it’s still a fluid situation,” Jones said.

“That doesn’t mean it’s going to be a bad year for markets, but I think the January selloff has set the tone for more nerves and volatility in 2022.”

Paradigm shift

For many investors, this is a new scene.

It’s been well over a decade since central banks have been able to generate upward pressure on inflation, despite their best policy efforts.

And that makes it “really interesting from a study of markets point of view”, Jones says.

“Interest rates have been on the floor for so long, and suddenly we’re looking down the barrel of rising rates,” he said.

On one hand, investors have to navigate rising rates coming off a low base, following ~2 years of historic policy stimulus.

The second key point, as Jones highlighted, is that no one quite knows how fast they’ll have to rise to contain inflation.

“That doesn’t mean markets can’t go up, but I think it means we’re going to be in for a tougher year,” he said.

And the market response so far offers some clues to how things will play out.

“If you look at the major indices – even though the S&P500 made a new all-time high (ATH) in January, it was November when we last saw an ATH for the Nasdaq. So tech started running out of steam a lot earlier than the broader market,” Jones noted.

“In that context, I think it will be a more selective year (for investors).”

“You can’t just effectively chuck a dart at the Nasdaq dartboard and make money. It will move back to more of a stock pickers’ market.”

Returning to his key tail-risk thesis – more rate hikes than expected – Jones said the resulting volatility “will probably make for a year where markets go sideways”.

“We’ve already seen (in February) how quickly markets can bounce back after a sharp fall, but ultimately I think it will result in a more frustrating year for investors,” he said.

Sector to watch

Turning from the macro view to a sector-specific focus, Jones flagged a certain precious yellow metal as a potential beneficiary in 2022.

“A lot of our clients love gold,” he says.

And it’s coming off a fairly poor year in 2021, trading flat compared to an annual gain of more than 20% for the S&P500.

“I think plenty of investors with a gold bias might be thinking this (2022) is their year,” he said.

He noted that despite multiple risks to start the year – higher inflation, rates uncertainty, market volatility and geo-political tensions – gold still has yet to make its move.

“I think it’s interesting that an asset class which everyone flees to in times of trouble isn’t rising,” he said.

Another selloff last week saw gold drop below US$1,800/oz, and “for investors in gold miners or physical gold, that could be an opportunity,” Jones said.

“It might be a bit too bullish to hit the highs of 18 months ago, but if things get really tough as the year goes on we may see a move into gold and gold miners,” he said.

Boring is back

On the stocks side, Jones noted that certain “boring” names have returned to favour in 2022, against “a backdrop of more nervous markets”.

“Going back to my example of being a stock picking year, you might not make 300% on Tesla but perhaps this is the year when the old ‘value’ stuff comes back into focus,” he said.

Being a London-based investor, Jones noted that the FTSE exchange hasn’t been hit as hard as the S&P500, which is subject to the volatility in big tech stocks.

“If you look at it on the index level, the FTSE has really lagged the S&P500 since the pandemic because the US has big tech whereas the UK is still primarily banks and energy,” he said.

“It’s all a bit boring in comparison, but the FTSE hasn’t been hit anywhere near as hard this month. So perhaps that ends up being one of the themes for 2022, when defensive blue-chip plays come back into favour.”

The views, information, or opinions expressed in the interview in this article are solely those of the writer and do not represent the views of Stockhead.

Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.