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Capital Market Impact

Investors’ interpretation of news has turned notably bearish

January 24, 2022
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Thoughts

  • Markets are set to open the week lower, setting the stage for the fourth weekly loss for the S&P 500® Index since September 2020. Markets plummeted last week in their third weekly loss to start the year, with the S&P 500 showing its worst week in nearly two years, losing nearly 6%. Highly valued technology companies and unprofitable companies have led the decline, with the NASDAQ now down 14% since its November high and is on pace for the worst month since the financial crisis. The “risk-off” approach has also impacted cryptocurrencies, with Bitcoin down nearly 30% this year and has been cut in half since November. Geopolitical concerns have driven a flight to quality, with the 10-year Treasury yield down from the recent high of 1.87% to 1.74%.
  • The market is being driven by 3 areas of concern: 1) Fundamental deteriorations with the earnings environment and economy starting to slow, 2) Investor fear over Fed policies and geopolitical tensions, and 3) Technical factors from the average stocks performing worse than the index, with investor sentiment starting to crack. A wave of news flow will move markets this week, including an FOMC meeting, earnings reports, and several important economic data releases. In addition, in measuring the final hour of trading only, this is set to be the worst month since October 1987, per Bespoke Research.
  • The character of the trading environment has shifted rapidly from “buy the dip” to “sell the rally,” with the S&P 500 seeing late-day selloffs in six of the past seven sessions. Expect to see continued stress for a few more weeks, but not a protracted downturn.

News

  • Earnings season is set to accelerate this week, with 13% of the S&P 500 companies having reported. The blended growth rate is tracking at 23% (better than the 21% expected at year-end), with 74% of companies beating expectations by an average of 6%. While these metrics are positive, they lag the strong momentum experienced over the past four quarters and have resulted in disappointing stock price reactions. Management commentary has been cautious on both demand and margins, as Omicron, supply chain disruptions, and labor shortages remain challenges. The estimate for the first quarter has edged lower, currently expected to grow just 6%, with full-year growth expected at 9%.
  • Investors will be focused on Wednesday’s FOMC meeting, which will likely set the stage for a tightening cycle to begin in March. The Fed futures curve embeds a 93% chance of a hike in March and a 69% chance of four-or-more hikes this year. This week’s statement is also expected to detail the end of asset purchases in March, along with a potential discussion on a plan to shrink the balance sheet.
  • Economic data continue to disappoint, with the Citi Economic Surprise Index back in negative territory. Mobility and other high-frequency data points continue to slow, with the NY Fed’s Weekly Economic Index breaking below 5% for the first time in nearly a year. Last week, housing starts were strong, though existing home sales were disappointing. Rising mortgage rates are a growing concern, with the national average for the 30-year mortgage rate above 3.5% for the first time since early in the pandemic. Omicron cases may have peaked on a national basis, setting the stage for a recovery.
  • Geopolitical tensions are high as President Biden enters the second year of his presidency, with the U.S. State Department instructing the families of diplomats in Ukraine to leave the country amid tensions with Russia. The Biden administration is considering sending thousands of troops to the region, as several neighbors are members of NATO. The administration is also considering placing export controls against Russia in the event of invasion, potentially further disrupting the oil market that has seen crude spike to $85 per barrel.

What to Watch

  • Investor attention will be split between an active week of earnings and the highly anticipated FOMC meeting this week. Economic data include PMIs on Monday, consumer confidence on Tuesday, new home sales on Wednesday, durable goods, pending home sales and the initial look at fourth-quarter GDP on Thursday, and the PCE deflator, personal income and spending, and consumer sentiment on Friday.
  • This material is not a recommendation to buy, sell, hold or roll over any asset, adopt an investment strategy, retain a specific investment manager or use a particular account type. It does not take into account the specific investment objectives, tax and financial condition, or particular needs of any specific person. Investors should work with their financial professional to discuss their specific situation.

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