Markets grew for the week for the first time in a month. Is it a reason to celebrate or a breather in the pullback?
Monday S&P 500 0.87% | NASDAQ 1.11%
Nine major companies reported earnings, with two missing expectations. Equities jumped to open the week. Outside of earnings data there was not much to support the rally. It was likely a jump on three consecutive weeks of down market, creating better by opportunities.
Tuesday S&P 500 1.20% | NASDAQ 1.59%
35 major companies reported earnings, with five missing expectations. Housing data came in better than expected. The heavy earnings data drove markets higher on Tuesday, pun intended. GM (GM) and Tesla (TSLA) were among reporters that helped propel markets.
Wednesday S&P 500 0.02% | NASDAQ 0.10%
40 major companies reported earnings, with six missing expectations. Core durable goods orders came in lighter than expected. Strong earnings data was counter-balanced by higher rate expectations. This left markets fairly unchanged.
Thursday S&P 500 0.46% | NASDAQ 0.64%
60 major companies reported earnings, with 13 missing expectations. GDP grew at a much slower pace than expected(1.6% vs 2.5%). Unemployment data continued to show strength. GDP and forward guidance from Meta (META) spooked markets early. They managed to climb halfway out of the hole that was dug as the earnings flowed in throughout the day.
Friday S&P 500 1.02% | NASDAQ 2.03%
13 major companies reported earnings, with five missing expectations. Consumer sentiment softened in April. Core Personal Consumption Expenditures (PCE) held steady at 2.8% in March. This is the Federal Reserve Board’s (FRB) preferred gauge of inflation. Between PCE data and earnings from Alphabet (GOOG) and Microsoft (MSFT) markets surged on the day.
Conclusion S&P 500 2.67% | NASDAQ 4.23%
The markets experienced a strong bounce back this last week in comparison to the last three weeks. Do not be fooled. Markets have a way to go to recapture highs as the growth did not even recover from the prior week. This indicates that there is room for markets to continue the run up as earnings season wears on. There are major hurdles this coming week with the FRB meeting, Jobs data, and Apple (AAPL) reports earnings.
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In many ways, 2021 felt like two years in one. Investing was no exception. Here is a review of the year from our perspective at FFS and what we are looking for from 2022.
Q1 2021
GameStop stole the show early in the year. In an anomaly, a group of Reddit traders took a reasonably good January (up about 3%) and wreaked havoc. The trade was clever, but greed eventually collapsed the trade and caused January to be a down month.
Mass roll out of vaccines dominated the headlines early in the year. People became excited on the hope of a return to normal life. This led to an expectation from investors that GDP was going to grow substantially in 2021. The thought was, as we got back out and spent money, the economy would boom. This led to what was affectionately referred to as the “re-opening” trade.
Q2 2021
The re-opening trade led to concerns about inflation increasing at a fever pitch, at least for a short while. The key term used by the Federal Reserve Board (FRB) repeatedly was transitory… Inflation rose 0.8%, 0.6%, and 0.9% across the quarter and 5.4% YoY through June.
The second quarter also gave us the Delta variant, which proved more virulent than earlier versions of COVID. The onset of Delta put a dampener on the expected re-opening boom over the summer. In effect, this held high inflation at bay… a little.
Q3 2021
As Delta occurrences faded after a few months, focus shifted sharply to supply line disruptions. The Bay of L.A. saw a point where around 86 freighters were anchored in bay waiting to be unloaded. The disruption caused what was expected to be transitory inflation to become more persistent.
September was a busy month for investors. A crisis in Evergrande debt, China’s energy demand, and debt ceiling debates gave reason for pause on equity markets. The S&P 500 fell by as much as 6% intra-month, which was the largest fall for the year.
Q4 2021
Fourth quarter is usually a quarter for growth as the consumer generally has a strong showing, courtesy of the holidays. October saw a market surge as the debt ceiling debate was pushed off to December. Helping matters were corporate earnings from Q3 that largely surpassing estimates.
Jobs perpetually improved across the year and inflation was firming. In response, the FRB decided to start cutting back on the amount of bonds they were buying. Rather than running in fear, the markets applauded the move (by increasing). It was viewed as the FRB avoiding the mis-step of waiting too long to act.
What would be a quarter without COVID, right? Thanksgiving Day the WHO announced a new variant out of Southern Africa named Omicron. This announcement killed any growth seen in November. As December unfolded the news coming out about Omicron was fairly positive. Yes, it was more infectious, but its symptoms appeared to be milder. As a result, there was less fear that Omicron would cause full blown shutdowns and markets regained composure.
2021 Summary
2021 proved to be a profitable year. It represented the first calendar year post recession. Historically year 2 (2022) is a good year as well, but there is a likelihood of diminished returns from 2021. Additionally, 2021 proved to have very low volatility. Something that is likely not to be repeated in 2022.
2022 Landscape
Inflation has persisted, but Q1 should calm down as consumers are historically dormant this time of year. Additionally, the reduced consumption will likely help the supply bottlenecks get cleared up. Yes, the bay of L.A. is still backed up.
Full employment is likely already upon us. December unemployment hit 3.9%. A level historically seen as “full” employment. This means rate hikes are not only a consideration, but a likelihood starting as soon as March. The FRB wants to get ahead of inflation, and they cannot do that without removing accommodation. Additionally, full employment gives them the freedom to focus on inflation.
This environment of FRB rate hikes will likely lend to heightened volatility throughout the year. The lack of a correction last year could mean one early this year. This would allow focus to shift to a strong earnings year and as a result, a strong stock year.
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Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services. Broad diversification across several asset classes with a long-term holding strategy is the best strategy in any market environment.
Any and all third-party posts or responses to this blog do not reflect the views of the firm and have not been reviewed by the firm for completeness or accuracy.