Market Update February 7, 2022
Photo by Jan Kopřiva on Unsplash
Economic data for the week included a much stronger than expected employment situation report for January, as well as a pullback in the ISM manufacturing and services indexes, although the two still lie solidly in expansion.
Global equity markets bounced back last week, with decent economic data and some improvement in the Covid caseload. Bonds fell back across the board, as interest rates continued to tick higher, along with the consensus opinion that central banks will be raising rates through 2020. Commodities gained ground again last week, led by crude oil prices, with high demand continuing to surpass more limited supply.
U.S. stocks continued to rebound from -10% correction territory, with gains through late in the week. However, sizable earnings misses from technology names, put a damper on the positive sentiment—Meta Platforms (Facebook) in particular was down by -25% at one point, due to falling user growth. Markets were a bit mixed in response to the surprisingly good Friday employment report, with more jobs meaning a more solid economy, but also a more solidified foundation for a Fed jumping-off point for an interest rate hike in March.
By sector, energy again led the way up 5% upon higher oil prices, followed by positive results from financials and consumer discretionary stocks. Communications lagged, down over -1%, in keeping with sentiment around Meta Platforms noted above. The slowdown in users for stocks such as Netflix and Meta are not too surprising, with such high additions in users during 2020-21 less likely to repeat at the same trajectory. Real estate was down slightly, along with higher interest rates.
Earnings expectations are more in focus than normal, now that 2021’s easy gains are behind us. Per FactSet, as earnings season for Q4-2021 progresses and 56% of firms reporting, it appears cyclical sectors industrials and materials have stayed in the lead, with overall expected S&P 500 earnings growth having ticked up to 29%. Profit margins are remaining at a solid 12.4% as well. Coupled with still-historically low interest rates, these strong margins are part of the rationale for allowable higher stock price valuations.
Foreign stocks gained largely in line with U.S. equities in developed nations, although emerging markets fared about a percent better. While several domestic markets in Asia were closed for the lunar New Year, tracking indexes/ETFs fared positively in those nations, as well as improvement in Russia. Despite the conflict with Ukraine, higher petroleum prices offset some of the negative sentiment, in addition to ongoing negotiations.
The Bank of England raised rates for the second time in the last few months, by another quarter-point to 0.50%, noting that it will also be easing out of owning corporate bonds. Interestingly, half of the committee wanted to raise by a half-percent, due to rising inflation pressures (the U.K. and Europe have consistently been more sensitive to these fears than the U.S.)—dissenters on the committee often appear before the media afterward to discuss their opinion, which doesn’t happen with the FOMC. As in the U.S., the turn from dovish policy (with no expected hikes) to hawkish (4-5 assumed hikes) for 2022 has been swift. The Japanese central bank on the other hand, has been in no rush, as inflation has remained contained, at a 0.5% year-over-year rate in December.
U.S. bonds lost ground across the board last week, as interest rates ticked higher across the yield curve (10-year treasury ending at just under 2.00%); the exception was floating rate bank loans, which fared positively. Foreign bonds were mixed despite a sharply weaker dollar (with strengthening in the euro and U.K. pound more of a factor, due to their more hawkish central bank policy announcements last week).
A precarious milestone was reached last week, as the U.S. total national debt topped $30 tril. That’s roughly 125% of GDP, and expanded largely due to Covid-based spending over the past two years. There seems to be no magic solution to this high number, with hopes that regular normalization will cause the ratio to drift lower in coming years. However, slower growth based on demographic factors could make that more challenging than in the past. The key concern—as with any individual, corporation, or government—is that a higher debt load will erode lender confidence, and lead to higher market-demanded interest rates. The saving grace is that many other developed nations are in the same boat of high debt, and America remains the ‘cleanest dirty shirt’ in the laundry, as it’s been described.
Commodities continued to gain ground in all groups, led by energy, while metals also saw lesser improvement. The price of crude oil rose by over 6% to over $92/barrel, with OPEC deciding to gradually increase production—not to the larger degree markets had hoped. Separately, a deal was struck with Qatar to provide natural gas to Europe (to lower the reliance on Russia) in return for being offered ‘associate membership’ in NATO—a unique development to say the least. This combination of factors, and lower incentives to produce more domestic oil, pushes the chances for higher oil prices asymmetrically upward.
Sources: LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.