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Capital Market Impact

Supply chain disruptions now hitting the equity markets

February 07, 2022
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  • Equity markets look to continue their winning streak to three weeks after a rough start to the year. Volatility remains intense, as investors continue to act on emotion. The first three weeks of the year were categorized by a predictable “pressure release valve” following an incredibly strong close to the year, driven by fear from an incrementally hawkish Fed. Over the past two weeks, the tone has shifted to confusion about the outlook and violent moves in individual names and indexes. The S&P 500® Index has now gained over 2% in the last two weeks after losing 8% in the first three weeks of the year. With earnings season beginning to fade, corporate buybacks will return, adding incremental demand to markets to supplement continued strong fund flows.
  • Momentum and sentiment indicators continue to reflect investor skepticism, with the Global Fear & Greed Index in negative territory, though improved from the reading in late January that was the worst since the initial stages of the pandemic. The put-call ratio had a similar spike, as investors sought downside protection. The S&P 500 briefly dipped below the 200-day moving average but rallied above by the end of the week. The bond market, however, continues to reflect a less turbulent environment than the equity market. Rates continue to tick higher, with the 10-year Treasury yield above 1.90%, but credit spreads have only widened marginally despite a surge in outflows from high-yield ETFs.
  • The supply chain issues causing disruptions throughout the economy have now arrived at the equity markets. Demand for shares is severely outstripping supply compared to where we were 18 months ago. Whereas supply shortages can have negative impacts on the macroeconomy, the same dynamic for stocks simply leads to changes in investor behavior. Today’s airline merger announcement is only the latest signal that companies will turn to acquisitions and share buybacks to satisfy their demand for shares, as IPO and SPAC activity continues to subside.


  • January payrolls grew a better-than-expected 467k, well above the 155k expectation. Additionally, the previous two months saw massive revisions, with December going to 510k versus 199k, and November at 647k from 249k. The unemployment counterintuitively rose 0.1% to 4.0%, driven by an improvement in the labor force participation rate. Wage gains were also impressive at 5.7% versus a year ago (see page 3 for detail), better than the 5.2% estimate and 5.0% in December. The JOLTS Job Openings report on Tuesday showed a higher-than-expected level of 10.9 million openings, well above the 6.5 million unemployed individuals. This strong report, along with a reading on CPI this week that is expected to be the highest since 1982 continues to push expectations for FOMC rate hikes.
  • Earnings season has crossed the midpoint, with 55% of companies having reported. Growth is tracking towards 29%, well above the 21% expected at the beginning of the quarter. Strong reports this week have driven the beat rate to 8%, still below the average from the past four quarters of 16%, stoking concerns around peak margins. Also, despite 77% of companies beating, less than half of those are seeing positive reactions in their share price. Management commentary surrounds a strong demand environment offsetting continued supply chain concerns, labor market tightness, and input price pressures. Uncertain guidance has impacted the outlook for earnings, with the estimate for first-quarter growth lower than the start of the year. Corporate sentiment softened to the lowest level in five years.
  • Much of the global central bank focus has been on the Federal Reserve, with the market now pricing in a 78% chance of five-or-more hikes this year, up from 20% a month ago, though increasing attention is now on Europe. The ECB has publicly held that inflation is transitory, though ECB President Lagarde shifted that view over the weekend, now refusing to rule out a rate hike this year. The 10-year German yield turned positive for the first time since May 2019, rising 0.41% this year to +0.23%. Eurozone inflation reached a record 5.1% in January, higher than December’s 5.0% and well above the 4.4% expectation.

What to Watch

  • After a frantic few weeks, earnings season begins to fade as a market driver, as the pace of releases slows. Inflation will be an area of focus, with consumer price inflation (CPI) on Thursday. Other notable releases include NFIB Small Business on Tuesday 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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