Market Update January 24, 2022

Photo by Kym MacKinnon on Unsplash

Economic data for the holiday-shortened week included mixed regional manufacturing results and housing data, higher jobless claims, but continued gains in the index of leading indicators.

U.S. equity markets, especially the Nasdaq-heavy group of technology stocks, fell back near or into correction territory. Foreign stocks fared slightly better than U.S., although also in the negative. Bonds were mixed, based on risk level. Commodities gained a bit on net, along with continued tight supplies in crude oil markets.

U.S. stocks started the week on a weaker note, with interest rates ticking higher and causing further concern for investors. From peak levels in December 2021 peak, the tech-heavy Nasdaq index and Russell 2000 small cap indexes have reached beyond correction territory at over -10%. However, the more diversified S&P 500 has not yet reached that -10% mark. The technology sector (about 30% of the S&P’s market cap weight) has been responsible for roughly half of the absolute return decline so far in 2020. (It’s important to note that almost every calendar year or two features at least one -10% stock price drop, and U.S. markets have been arguably overdue.)

Every sector was in the red last week, led by consumer discretionary (-8%) and technology, but also financials. Defensives consumer staples and utilities fared far better, with minimal losses, as expected. Real estate fell back around -3%, which outperformed many other segments. Popular stock Netflix was hit particularly hard (down -20%), with a decline in subscriber growth, as pandemic concerns (and at-home TV watching) appeared to wane. With the price of the stock appearing quite high by a variety of metrics, such a drawdown wasn’t unexpected, but a jarring reminder of the easy earnings gains of 2021 now behind us. Aside from interest rate and inflation concerns, Russian activity at the Ukrainian border has raised geopolitical uncertainty, as have continued high Covid omicron case rates.

Earnings for Q4 are beginning to roll in, with mixed results. Aside from the Netflix disappointment noted above, several financial firms also disappointed earlier in the week. However, while overall growth remains above-average, cautionary management guidance on several earnings calls about the future growth have been another catalyst for weakening sentiment—rising interest rates have fueled this negative tone in recent weeks. Compared to a robust 2021, a more tempered 2022 was largely expected, although the Covid omicron variant doesn’t seem to have overly worsened conditions. Per FactSet, Q4 year-over-year growth is expected to run at just under 22% (which remains robust historically). Hard-to-beat base effects (from a bad 2020) and supply chain issues have pulled down expectations, although the common ‘underpromise early and overdeliver later’ tendency for earnings reports can be common. In short, fundamental conditions remain strong, but not as much so as last year. Markets can overreact to times of change more than they do absolute levels.

While also negative, foreign stocks held up better than U.S. stocks last week, in part due to different monetary policy timelines and lower valuations. It was expected that the ECB will follow in line with the U.S. Fed and raise policy rates, although later in the year. However, the ECB’s response has been more dovish, with mixed opinions on the committee it appears. Japanese markets were hampered by several regions placed under additional emergency measures in response to omicron, and dovish central bank language. Emerging markets were mixed, with stronger sentiment in Brazil and China, along with a cut in interest rates for the latter; Russian stocks plummeted again with tensions with Ukraine remaining high and possible sanctions on the horizon.

U.S. bonds were mixed, with longer-term treasuries faring positively, in line with risk-off sentiment, although the 10-year treasury briefly reached 1.9% before falling back. High yield and bank loan prices declined. Developed market bonds fell back in keeping with a stronger dollar, while emerging market bonds interestingly fared positively—counter to a tendency to act as a risk-off asset.

Commodities gained last week to a minimal degree, with increases in all major sub-groups, led by agricultural prices. The price of crude oil rose by over a percent to just above $85/barrel, offsetting an over-10% decline in natural gas prices due to higher supplies. As often happens in these scenarios, oil price estimates for coming months have risen (to $100/barrel or more in some cases); however, estimates in the middle of such periods often tend to end up being inaccurate. Factors keeping oil prices high include supply, with little spare capacity remaining, and OPEC nations not feeling an immediate need to ramp up further production. Demand is also continuing to improve, due to the omicron variant’s less severe nature resulting in shorter lockdowns and an anticipated faster return to higher activity levels and mobility. Oil production and distribution assets are difficult to turn on and off quickly, causing demand/supply mismatches that can move prices in unforeseen directions quickly. As an example of this unanticipated speed, the early 2020 negative -$37/barrel futures price comes to mind, when oil literally couldn’t be given away fast enough, but times have changed.

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.