Markets sold consistently across the week. Is there more red to expect in coming weeks?
Monday S&P 500 1.20% | NASDAQ 1.79%
Happy Tax Day! Retail sales expanded more than expected in March. Three major companies reported earnings, all three met expectations, all of which were financials. This was not surprising as financials usually head up earnings season. They also give us a good indication of how earnings season should go. Retail sales, however, took center stage as a strong consumer reduces the need for Federal Reserve Board (FRB) rate cuts. This caused an outsized move downward as investors anticipate less stimulus for 2024.
Tuesday S&P 500 0.21% | NASDAQ 0.12%
Housing data for March came in weaker than market expectation. Ten major companies reported earnings, with two missing expectations. Although mild, the losses continued. FRB Chair Powell indicated that inflation’s recent strength does not give the board confidence to start easing policy.
Wednesday S&P 500 0.58% | NASDAQ 1.15%
11 major companies reported earnings on the day, with three missing expectations. Focus was squarely on earnings as there was little economic data on the day. Tech stocks took a hit as AI chip orders for a specific company did not meet expectations. As would be expected this hit the tech heavy NASDAQ harder than the S&P 500.
Thursday S&P 500 0.22% | NASDAQ 0.52%
Initial unemployment claims remain benign. Existing home sales also slowed in March. 11 major companies reported earnings on the day, with one missing expectations. Markets were down for the day, but in a less dramatic fashion. Robust employment data typically is not favorable information when hoping for an FRB rate cut (as investors are).
Friday S&P 500 0.88% | NASDAQ 2.05%
Six major companies reported earnings on the day, with one missing expectations. NASDAQ led the way lower as Tech and communications got hit hardest. The best performers on the day were defensives, like utilities, healthcare, staples, and also financials.
Conclusion S&P 500 3.05% | NASDAQ 5.52%
The week was bloody. There was not a single up day for the S&P 500 or the NASDAQ Composite. The moves were not founded in fundamental data, as earnings did well. Some forward guidance shows warning of slowing revenues throughout the year, but that is normal for the last two years. Economic data, which signals the economy is doing well, has actually pushed stocks lower. The stronger the economy, the less likely the FRB is to act in reducing rates. The sell-off has extended to approximately 6%. It may take a breather in the coming days but expect that we are not done.
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Headlines included Omicron, Jobs, Manufacturing, and Services PMI. So, what led the charge lower and why?
Monday
The S&P 500 jumped to open the week, rising 1.32%. This was a bounce day after a strong move lower the previous Friday. The bounce is not surprising as the move lower was based on information not formerly available (Omicron). Light market trade on Friday from the holiday on Thursday exasperated the situation.
Tuesday
Selling pressures resumed on Tuesday as all the gains from Monday were reversed and then some. The S&P 500 fell 1.90% on the day. Federal Reserve Board (FRB) Chair Powell indicated that inflation was proving more resilient than anticipated while testifying on Capitol Hill. This gave markets moment for pause. This is an indication that we will likely see rate hikes (monetary tightening) quicker than anticipated.
Wednesday
Wednesday started strong as investors responded favorably to ISM Manufacturing data. That momentum quickly faded, however, as the first case of Omicron was detected in the US. The S&P 500 gave back another 1.18%.
Thursday
Another bounce came on Thursday as the markets faded Omicron concerns. Initial jobless claims continued their run at lower levels as only 222K initial claims were filed. The S&P 500 rose 1.42%.
Friday
Happy Jobs Friday! It was a mixed report. Private nonfarm employment was a hard miss, coming in at 235K when 530K were expected. The rate of unemployment fell, however to 4.2%, even as participation rose to 61.8%. Largely overlooked was the fact that ISM Services PMI rose to 69.1 for November. Services make up over 80% of our economic activity, this data carries strong meaning. For perspective, this is the highest reading dating back to the start of tracking in 1997. The pandemic low (April) was 41.8!
Conclusion
Interestingly, the jobs data released on Friday seemed bleak as a result of seasonal adjustments. In all actuality, 778K jobs were added, but, that is adjusted down in comparison to last year’s figures. Aside from a miss on wage growth (which actually signals less inflationary pressure), the jobs report was quite favorable:
- 778K jobs added
- 4.2% unemployment rate, a decrease
- 61.8% participation, an increase
- 7.8% Underemployment rate, a decrease
- 4.8% YoY Earnings increase, equal
So why the fall on markets? The FRB has a dual mandate, inflation of approximately 2% and full employment. Full employment has historically been deemed to occur at around 4%, however inflation is running hot at 5% (PCE). Investors see the job market as stable enough that the FRB will be turning their attention to inflation. This happens by the FRB taking away accommodative policies such as bond buying programs. It then moves to them tightening monetary policy by raising interest rates and selling bonds on their balance sheets. All of which signals contained economic growth expectations in the near term.
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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.