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.
SWEEPING UNCERTAINTY SUSTAINS MARKET VOLATILITY.
US Markets
With so many competing narratives lately, the year-to-date price action of our major US indices can accurately be characterized as showing elevated volatility. This means, on average, we are seeing an increased volume of shares trading and the largest price fluctuations since the start of Covid in 2020. For perspective, in 2021, the S&P 500 did not have a peak-to-trough drawdown of more than 6%. This year, we have already seen a peak-to-trough drawdown of 12%.
Market participants have optimism rooted in excellent earnings reports from the largest companies including Amazon, Microsoft, and Apple. On the pessimism side, we have market participants on edge due to rising inflation, weakening consumer sentiment, and fears that Russia will invade Ukraine. We have excitement around the news that Covid-19 restrictions are being eased across the country, yet we are concerned that the market internals are weak. Market Internals speak to participation. Below the surface of the major stock indices, many stocks are being aggressively sold. This lack of participation is a problem. The largest US market indices are selling off as a result.
The headlines will read, “Inflation Fears Crush Markets,” and “Markets end the week lower amid inflation concerns.” These are truths, but truths of omission. The largest averages did sell off last week. The Nasdaq 100 closed lower and gave back -3.06% in value. The S&P 500 closed lower and gave back -1.84% in value. The Dow Jones Industrial Average closed lower and gave back -1.0% in value. Note however, smaller, less covered indices gained last week. The S&P 600 small-cap stock index and the S&P-400 mid cap stock index both gained on the week. Even the speculative Russell 2000 small-cap index closed higher last week. This bifurcation, of small and mid-sized companies being purchased while large companies were being sold, speaks to market participants being uncertain about what comes next.
Market Moving Headlines
While the market moving earnings are behind us, we still have plenty of earnings being released in the weeks ahead. Last Monday, 02/07, Tyson Foods, ticker symbol TSN, beat analysts’ expectations by reporting a 24% increase in revenue totaling $12.9 billion last quarter. Tyson Foods is forecasting 2022 sales to be roughly $50 billion, which would be a 6% year-over-year increase from 2021’s $47 billion in sales. This company has been an incredible place to put some money to work. Since bottoming in 2008, aside from the Covid plunge, price has traveled up and to the right. If you had bought Tyson Foods at its 2008 low, you would certainly be enjoying your gain of over 2,000% without even considering income from dividends. This company has appreciated in value more than 3 times the S&P 500 over this same period.
Through Wednesday of last week, the narrative was CVS and Pfizer falling on missed revenue numbers caused by declining demand for Covid-19 tests and vaccines, while air and cruise lines gained on news of state governors relaxing mask mandates. In fact, Royal Caribbean, Carnival, and American Airlines finished in the top 20 of the S&P 500 stocks. Going into Thursday, the narrative shifted. Market participants became laser focused on inflation and on the release of the Consumer Price Index numbers, known as the CPI.
The CPI measures the change in prices paid by consumers for goods and services. It is a measure of inflation. The CPI calculates how quickly inflation changes over time. The Street was expecting a highly elevated reading with the consensus estimate being a 7.30% change year-over-year. Thursday morning, the Bureau of Labor Statistics reported a stunning 7.53% change from January 2021 to January 2022. This is the highest CPI reading since 1982, 40 years ago. Stocks, commodities, and bonds largely sold off, as the 10-year US Treasury yield rose to over 2% for the first time since 2019. This is the last CPI reading we will get before the Federal Reserve meets March 15th – 16th to discuss how they will deal with this, now persistent, inflation that is devastating consumers of our lower and middle classes. Friday the narrative did not improve. The monthly University of Michigan’s Consumer Sentiment Index came in at a disappointing 61.7, down from 67.2 in January, which was well below economists’ expectations of 67. This is the lowest level we have seen since 2011.
International markets
While none of our major international ETFs have gained in value year-to-date, we did see relative strength as some international markets closed higher last week. Developed markets ex-US, closed for a loss of 0.51%. Emerging markets gained 0.12% in value. Frontier markets gained 0.83% in value. In the developed market space, our gold medal winner was Singapore which gained 2.7% in value. In the emerging market space, our gold medal winner was Chile which gained 7.86% in value. In the frontier market space, our gold medal winner was Argentina which gained 3.68% in value. Brazil continues to lead the world in gains this year-to-date. Last week’s close brings Brazil’s gains to almost 16%.
Fixed Income
Bonds have been selling off all year, and last week was no exception. Of the 24 bond ETFs I track, last week 18 of those 24 closed at new 52-week lows. US Treasury bonds sold off harder on the longer end of the yield-curve. In the corporate bond space, high-yield bonds, aka junk bonds, sold off the most. International bonds sold off as well. Notably, in the US, Treasury Inflation Protected Securities, known as TIPS, had some buyers. This enforces the idea that market participants believe there is more inflation ahead. The US 10-year treasury yield closed at 1.92%, its highest level since 2019.
Commodities
Commodities continues to be a bright spot for investors. It was the only asset class to finish with a gain last week, the three asset classes being bonds, stocks, and commodities. Last week the largest gains came from metals and agriculture. 2022’s darling, energy, finished up for the week, but the gain was small as the almost 12% fall in natural gas offset the gains in gasoline and oil. Year-to-date, crude oil, gasoline, and the precious metal palladium are leading the charge. Each has gained more than 21% in value.
The US Dollar gained and closed at $96.07. WTI Crude Oil gained and closed at $93.10 per barrel marking an 8 year high. Gold gained and closed at $1,838.07 per ounce. Gasoline gained 2.24%.
The Week Ahead
Next week we have more than 50 S&P 500 companies reporting earnings. These include NVIDIA, Walmart, Alibaba, Applied Materials, Vornado, The Cheesecake Factory, and others.
Promising to drive continued market volatility, and likely selling, we have the Bureau of Labor Statistics giving us another update on inflation. On Tuesday, 02/15, they will release the PPI, Producer Price Index, numbers for January. In contrast to this week’s Consumer Price Index, CPI, which measures inflation for consumers, the PPI measures inflation on input costs for producers of goods. December’s reading was a staggering 9.7%. The Street’s current consensus estimate is 9.1%.
It is likely that US equity indices are in for continued volatility ahead, as market participants continue to sell growth stocks and buy companies with strong earnings and pricing power. It is also likely we will continue to see strength from energy stocks, financial stocks, consumer staples stocks, commodities, and from some international markets.
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