This bi-weekly financial section is published in USA Today's: The Town Journal. This is a publication distributed in Bergen County New Jersey, covering 4 towns with roughly 22,000 residents.
MORE PAIN FOR THE US MARKETS AHEAD?
US Markets
What a week! Last week market observers witnessed a classic battle between bulls and bears. The markets whipped back and forth on massive trading volume. The volume reached levels not seen since the Covid plunge of March 2020. The daily price action was extreme, with Monday being the first time in history the Dow Jones Industrial Average reversed a 1,000+ point drop to close with a gain. When the final bell rang Friday afternoon, bolstered by excellent earnings reports from Apple and Microsoft, the markets managed to close in positive territory. The S&P 500 Index gained +0.91%. The Nasdaq 100 index gained +0.11%. The Dow Jones Industrial Average was the best performer of the week, and it gained +1.34%. The energy sector continues to be a bright spot in 2022 for us equities, riding the seemingly unending trend of higher oil and gas prices.
Market Moving Headlines
Last week was full of headlines about geopolitical tensions centered on Russia. Russia controls the Nord Stream natural gas pipeline which supplies a large part of Europe with its natural gas. This conflict of interest is making it difficult to control Russia’s actions.
Wednesday, 01/26, was a Fed-day. After The Federal Reserve’s first Federal Open Market Committee (FOMC) meeting of 2022, we learned that the outcome was consistent with the Fed’s recent hawkish shift towards tightening monetary policy. Chairman Powell confirmed that the committee is “of mind to raise rates at the March meeting” and the Committee believes there is ample room to increase rates “without threatening the labor market”. Chairman Powell indicated that raising the federal funds rate will be the Fed’s primary means of reducing inflation. The Fed anticipates that there will be three interest rate hikes this year and three rate hikes in 2023
The markets are currently at the heights of the first earnings season of 2022. Last week we had major companies reporting earnings including Apple, Microsoft, and Tesla. Apple smashed earnings estimates and reported the company’s largest quarterly sales numbers in its history thanks to exceptional iPhone and Mac sales. Revenue spiked +11% to $123.9 billion. The report did note a supply headwind and declining iPad sales. Apple also announced a plan to allow iPhones to accept credit card payments to compete with the company Square. Apple gained +4.88% last week and is now down just under -5.0% from its last all-time closing high made in early December of 2021.
Microsoft also beat estimates on earnings and revenue. Additionally, the company issued positive guidance for the upcoming quarter. The stock price closed with a +4.13% gain for the week. Tesla also beat analysts’ expectations on both its top and bottom lines. CEO Elon Musk offered a “product road map,” saying the company will not release any new models due to chip shortages. Tesla will instead focus on developing autonomous vehicle technology and on scaling up production at its factories in Texas and Germany. Tesla lost -10.33% of its value on the week.
International markets
As a whole, international markets finished lower last week and fell more than their US counterparts. On a year-to-date basis however, foreign equities have fallen less than US equities. Developed markets ex-US finished down -2.11% last week, while emerging markets finished down -3.49% last week. Looking under the surface to individual country markets, we can find the biggest winners in Chile, Brazil, and Columbia. These markets have returned double digit growth this year-to-date while the US markets are still in negative territory to start 2022.
Fixed Income
The Core US Aggregate Bond Index finished lower for the second straight week. Investment grade corporate bonds continue to sell off, as do US Treasury, and junk bonds. Declining bonds mean rising rates, and that generally happens when market participants are expecting more inflation. This matches the fact that the only US Treasury bond that finished last week with a positive return was TIPS – Treasury Inflation Protected Securities. Investors buy TIPS when they are expecting inflation. The yield on the 10-year US Treasury bond finished the week at 1.77%.
Commodities
In addition to US energy companies and the foreign markets mentioned above, commodities continue to be another bright spot in the marketplace. Many of them are up double digits to start this year. WTI Crude oil gained +1.97% last week and closed at $86.82 per barrel. Gold lost -2.23% and closed at $1,792.26 per ounce. Gasoline gained +4.3%. The US Dollar gained 1.67% and closed at $97.22.
The Week Ahead
This upcoming week will be another important and exciting one. Many S&P 500 companies report their earnings. This list includes Amazon, Alphabet (Google), and Meta Platforms (formerly Facebook). Tuesday, 02/01, Alphabet reports earnings. The report is expected to show strong growth driven by advertising revenue from ads sold on Google and YouTube. Wednesday, 02/02, Meta Platforms reports. They plan to debut “a new financial reporting structure,” which the company will use to share “more details on its Family-of-Apps.” These apps include Facebook, Instagram, Messenger, WhatsApp, and Reality Labs – which encompasses Meta’s augmented and virtual reality hardware, software and content. Thursday, 02/03, Amazon reports. Expectations are to see increased revenues from 2020 by nearly 10%.
In addition to earnings data, market participants will also receive key employment data. On Wednesday, 02/02, ADP will release its National Employment Report. This report is considered a preview of the Labor Department’s report which will be released on Friday. ADP is expected to report fewer private jobs were added to the economy in January, compared to the 807,000 jobs added last December, as holiday hiring has now unwound. On Friday, 02/04, the Labor Department will release its nonfarm payrolls report for the month of January, with the consensus estimate at 155,000 jobs. That number should be down slightly from 199,000 in December.
So, is there more pain ahead for US markets? With extremely negative investor sentiment and rapidly deteriorating market internals, the major US indices are off to their worst starts in years. That said, we did see some of the largest companies beating earnings expectations this week and the equity markets temporarily stabilized. The message from the markets has been incredibly mixed and more difficult to understand than it normally is. Bulls are hoping for the theme of buying companies on strong earnings reports to continue this week as Alphabet, Meta Platforms, and Amazon report. The best-case scenario is buyers step in on strong earnings while ignoring mixed economic reports. The neutral-case is that the markets trade sideways and show no real losses or gains. The worst-case is that we see the markets resume the selling while ignoring fantastic earnings reports from the largest companies in the marketplace. There is a Wall Street adage that reminds us, “A market bottom is an event while a market top is a process.” I can see a short-term bounce ahead, but as of now, I see very little evidence that we have seen a bottoming event. As investors and market participants, it is best for us to watch the data unfold in real time while maintaining unbiased and rational open minds.
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