There was an onslaught of data last week, which led to gains. Should more be expected with the coming earnings season?
Monday S&P 500 0.27%| NASDAQ 1.09%
ISM Manufacturing unexpectedly slipped and remains in contractionary territory. The weaker economic data would typically signal lower rates as rate cut expectations would increase. To the contrary, 10-year treasuries rose on the day. In the face of weak economic data, the start of the quarter brought optimism towards the next three months.
Tuesday S&P 500 0.62% | NASDAQ .84%
JOLTs job openings rose more than expected to 8.14M openings. For perspective, there were 6.6M unemployed as of the May report. The strong jobs data did not deter markets, though; this may be because the Federal Reserve Board (FRB) Chair, J. Powell, spoke on the day. He indicated that progress is being made towards their inflation target. This is the ‘secret sauce’ needed to justify future rate cuts.
Wednesday S&P 500 0.51% | NASDAQ 0.88%
Initial jobless claims rose for the week to 238K from 234K; the level remains elevated, albeit from all-time lows. Factory orders unexpectedly slipped into the negative on the month. Additionally, ISM Services unexpectedly slipped into contractionary territory. This is all bad news for economic production, so why did the markets rise? Interest rates fell as this data increases the likelihood that the FRB will lower rates sooner than expected. The heightened odds are now calling for a .25% cut in September and December, according to CME FedWatch.
Thursday S&P 500 -% | NASDAQ -%
Happy Independence Day!
Friday S&P 500 0.54% | NASDAQ 0.90%
Happy Jobs Friday! The unemployment rate rose to 4.1%, Nonfarm payrolls beat expectations, and participation rose to 62.6% from 62.5%, all for June. The unemployment rate went up even though we added 206K jobs??? Participation went up so, with more people in the market, the rate can go up even as jobs are added. This is a positive signal that workers are returning to the work force. The rise on equity markets, however, was on hopes that economic weakness would be enough for an FRB rate cut.
Conclusion S&P 500 1.95% | NASDAQ 3.55%
This was a busy week for economic data, especially for a holiday shortened week. We got weaker Jobs, manufacturing, Services, and Factory orders. The weakness led to stronger markets on hopes the FRB will cut rates BEFORE a recession can materialize. The coming week starts second quarter earnings. Valuations are stretched (S&P 500 P/E: 28.94) and economic production is weak, very little should be expected from this season. This could be the start of volatility that would lead into the Autumn.
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In many ways, 2021 felt like two years in one. Investing was no exception. Here is a review of the year from our perspective at FFS and what we are looking for from 2022.
Q1 2021
GameStop stole the show early in the year. In an anomaly, a group of Reddit traders took a reasonably good January (up about 3%) and wreaked havoc. The trade was clever, but greed eventually collapsed the trade and caused January to be a down month.
Mass roll out of vaccines dominated the headlines early in the year. People became excited on the hope of a return to normal life. This led to an expectation from investors that GDP was going to grow substantially in 2021. The thought was, as we got back out and spent money, the economy would boom. This led to what was affectionately referred to as the “re-opening” trade.
Q2 2021
The re-opening trade led to concerns about inflation increasing at a fever pitch, at least for a short while. The key term used by the Federal Reserve Board (FRB) repeatedly was transitory… Inflation rose 0.8%, 0.6%, and 0.9% across the quarter and 5.4% YoY through June.
The second quarter also gave us the Delta variant, which proved more virulent than earlier versions of COVID. The onset of Delta put a dampener on the expected re-opening boom over the summer. In effect, this held high inflation at bay… a little.
Q3 2021
As Delta occurrences faded after a few months, focus shifted sharply to supply line disruptions. The Bay of L.A. saw a point where around 86 freighters were anchored in bay waiting to be unloaded. The disruption caused what was expected to be transitory inflation to become more persistent.
September was a busy month for investors. A crisis in Evergrande debt, China’s energy demand, and debt ceiling debates gave reason for pause on equity markets. The S&P 500 fell by as much as 6% intra-month, which was the largest fall for the year.
Q4 2021
Fourth quarter is usually a quarter for growth as the consumer generally has a strong showing, courtesy of the holidays. October saw a market surge as the debt ceiling debate was pushed off to December. Helping matters were corporate earnings from Q3 that largely surpassing estimates.
Jobs perpetually improved across the year and inflation was firming. In response, the FRB decided to start cutting back on the amount of bonds they were buying. Rather than running in fear, the markets applauded the move (by increasing). It was viewed as the FRB avoiding the mis-step of waiting too long to act.
What would be a quarter without COVID, right? Thanksgiving Day the WHO announced a new variant out of Southern Africa named Omicron. This announcement killed any growth seen in November. As December unfolded the news coming out about Omicron was fairly positive. Yes, it was more infectious, but its symptoms appeared to be milder. As a result, there was less fear that Omicron would cause full blown shutdowns and markets regained composure.
2021 Summary
2021 proved to be a profitable year. It represented the first calendar year post recession. Historically year 2 (2022) is a good year as well, but there is a likelihood of diminished returns from 2021. Additionally, 2021 proved to have very low volatility. Something that is likely not to be repeated in 2022.
2022 Landscape
Inflation has persisted, but Q1 should calm down as consumers are historically dormant this time of year. Additionally, the reduced consumption will likely help the supply bottlenecks get cleared up. Yes, the bay of L.A. is still backed up.
Full employment is likely already upon us. December unemployment hit 3.9%. A level historically seen as “full” employment. This means rate hikes are not only a consideration, but a likelihood starting as soon as March. The FRB wants to get ahead of inflation, and they cannot do that without removing accommodation. Additionally, full employment gives them the freedom to focus on inflation.
This environment of FRB rate hikes will likely lend to heightened volatility throughout the year. The lack of a correction last year could mean one early this year. This would allow focus to shift to a strong earnings year and as a result, a strong stock year.
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Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services. Broad diversification across several asset classes with a long-term holding strategy is the best strategy in any market environment.
Any and all third-party posts or responses to this blog do not reflect the views of the firm and have not been reviewed by the firm for completeness or accuracy.