Market Strategy 1/10/2022
- January 10, 2022
What, Me Worry?
Last week’s equity market declines on inflation worries likely created buying opportunities for those looking for the “babies thrown out with the bathwater.”
Key Takeaways
- Q4 earnings season unofficially starts on Friday this week when the first of the big banks begin to report results. According to FactSet earning growth is expected to reach 21.7% year-on-year, which would mark the fourth straight quarter of growth in excess of 20%.
- Fed Chair Jerome Powell’s confirmation hearing begins on Tuesday when he meets with the Senate Banking Committee.
- Last week saw a pullback in US equity markets stemming from a combination of inflation fears and concerns that the Fed will be more aggressive than initially thought. In addition, worries remain about the impact of the Omicron variant on economic reopening stateside.
- That said, economic data released last week from the ISM survey and the nonfarm payroll report suggest that businesses and consumers are navigating the variant in stride.
After ending 2021 with a Santa Claus rally stocks stumbled in the first week of the new year as the release of the Federal Reserve’s FOMC December meeting minutes provided a more detailed view of what had been said in last month’s meeting. This provided a picture of a central bank somewhat more hawkish than the Fed Chair’s comments had signaled when exiting the meeting last month.
Prospects for faster-than-anticipated US interest-rate increases caused the S&P 500 and the NASDAQ Composite (over 40% weighted in tech or tech related names) to suffer respective downdrafts of 1.87% and 4.53% on the week ended last Friday. The declines generated much breathless commentary and excitement last week from the bear camp among investors who just last year had experienced great consternation as those same aforementioned indices respectively advanced 26.89% and 21.39% notwithstanding uncertainties and challenges present throughout 2021
Along with concerns about inflation and prospects for increased vigilance by central banks around the world investors continue to weigh what the impact of the latest variants of COVID-19 will be on economic re-openings stateside and elsewhere.
The Dow Jones Industrial Average with just 30 stocks that offer significant exposure to large cap value vs. large cap growth stocks last week slipped just 0.29%. The S&P 400 (mid-caps) and the S&P 600 with notable exposure to a mix of value and growth stocks respectively shed 1.72% and 1.23% on the week
The COVID Virus Remains a Concern
As we prepared to go to press with this week’s commentary, markets in Asia were starting the week mixed as investors pondered more stock and bondmarket volatility as markets open into the second week of trading in 2022. Along with concerns about inflation and prospects for increased vigilance by central banks around the world investors continue to weigh what the impact of the latest variants of COVID-19 will be on economic re-openings stateside and elsewhere.
But Earnings Will Regain Focus on Friday
On Friday Q4 earnings season for the S&P 500 unofficially gets under way as the big US banks begin to report results. With the financial sector expected to find tailwinds from a likely steepening yield curve over the course of this year investors will be eager to see big bank results for the quarter just ended to gauge which industry leaders within the sector stand to outperform their peers in the months ahead.
Last week saw US Treasury yields move higher across the board as bond prices fell after the release of the Fed’s minutes from its December meeting. The yield on the US 10-year Treasury note jumped 25 bps (to 1.764% from 1.512% at the prior week’s close) rising over 16.6% over the course of the week to its highest level in almost two years.
The Week Ahead
This week will likely find investors focused on a number of key economic data including the CPI, the core CPI (exfood and energy), the PPI and the core PPI, major gauges of consumer and small business sentiment along with the release of the Federal Reserve’s Beige Book which provides insight to the state of the economy from a perspective of the communities served by the Fed’s regional bank branches throughout the country.
Fed Chair Jerome Powell’s confirmation hearing on the Senate Banking Committee’s agenda for Tuesday will garner significant attention this week on Capitol Hill, Main Street and on Wall Street. A number of Federal Reserve governors will also be speaking about the economy and monetary policy in a number of meetings around the country.
Economic data crossing the transom last week was mixed with US employers adding fewer jobs than had been expected in December while wages rose more than anticipated and the unemployment rate neared a record low reminiscent of the historic low achieved just prior to the pandemic.
A busy start to the New Year along with somewhat heightened volatility should come as no surprise to investors considering the challenges the US and international economies have been through since the start of the pandemic through today. In such times patience remains a virtue which in our view should serve investors well along with portfolio diversification.
We are reminded that with increased volatility and risk history has shown that often opportunity arise for investors to find “babies that get thrown out with the bathwater.” We suggest that investors know what they own in their portfolios and why they own it as well as maintaining right-sized expectations of how different asset classes are likely to perform in transitional periods coming out of crisis moving towards “the next new normal.”
John Stoltzfus
Title:Chief Investment Strategist, Oppenheimer Asset Management Inc.
John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.
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