Market Validates Flight to Safety Environment
With the overnight invasion, International Developed and Emerging Markets ended the week down -2.5% and -4.9%, respectively, while the S&P 500 gained 0.84%. In addition, the best performing S&P 500 sectors for the week were Healthcare, Utilities, and Real Estate further validating a flight-to-safety environment. Though U.S. equity markets rallied that last two days, Sowell’s tactical signal was tipped into negative cautious territory as the underlying fundamental factors exhibit short-term macro uncertainties when it comes to interest rates, bond spreads, and inflation.
Russia-Ukraine Tensions Elevate Oil Prices
Crude oil prices have been rising for many months now, since bottoming in April of 2020 due to pandemic demand. But the current Russia – Ukraine tensions have elevated oil prices even higher as Brent Crude oil surpassed $95 per barrel last Wednesday. Russia is one of the world’s largest oil producers (see graph), and concerns that supply disruptions from the major producer in a tight global market could push oil prices higher. Oil price increases are thought to increase inflation and reduce economic growth. Oil prices directly affect the prices of goods made with petroleum products.
Core Prices Up Most Since 1982
Inflation data, hawkish Fed officials, and geopolitical tensions all weighed on equities last week. The consumer price index for January for all items rose 0.6%, driving up annual inflation by 7.5%. This price increase was the highest since February 1982, according to cnbc.com. Core prices, which exclude food and energy, rose 6%, the most also since 1982. In February, inflation worries were reflected in the University of Michigan’s preliminary gauge of consumer sentiment. The reading came in well below expectations, reaching the lowest level since towards the end of 2011.
Volatility Driven by Mega Cap Earnings
We could see further volatility this week as more companies report earnings. Notable companies such as Pfizer, Disney, Coca-Cola, Twitter, and Uber will be reporting earnings. Much attention will be given to Thursday’s Consumer Price Index (CPI) numbers, indicating whether the pace of inflation eased in January or not. The expectation is that inflation has slowed slightly from the previous month of December.
Earnings from Tech Giants
This week brings earnings from some of the largest technology firms. Companies such as Amazon, Alphabet, PayPal, Snap, and Meta Platforms are expected to report earnings. On the economic front, it’s all about the labor market. On Wednesday, we will get a gauge on the labor market with ADP releasing its National Employment Report showing the number of private jobs added in January. The Labor Department will release its nonfarm payrolls report for January on Friday.
Tech Stocks Dive
The equities market had the biggest decline last week in over a year as anxiety over rising interest rates and fear of slowing economic growth pushed equities lower. Technology stocks, as measured by the Nasdaq Composite index, had their biggest weekly drop since the start of the pandemic, falling into correction territory. Consumer discretionary and financials shares did not fare much better. Fears that the Federal Reserve will be more aggressive in raising rates caused investors to sell.
It’s Earnings Season!
The focus this week turns to fourth-quarter company earnings, which in general is expected to be a stronger profit growth for economically sensitive value stocks such as energy, materials, and industrials compared to high growth technology companies. These economically sensitive sectors do better when there is inflation as their margins increase. The earnings reports will also show how companies are handling inflation. Notable names are reporting this week, such as Goldman Sachs, Travelers, and Bank of America, along with Netflix, United Airlines, and Procter & Gamble.
2021 Sets Jobs Creation Record
On Friday, we saw a disappointing jobs report as the U.S. economy added fewer jobs in December than expected. Despite a lower number, the jobs report showed a rise in hourly earnings, and the unemployment fell to 3.9%. According to Reuters, a record 6.4 million jobs were created in 2021, the highest annual increase in employment since record-keeping started in 1939. The 10-Year U.S. Treasury yield closed below 1.8%, continuing its run from the end of the year where the yield was around 1.5%.
Santa Claus Rally Reaches Records
The Santa Claus rally pushed equities to record highs the last week of the year. The real estate, utilities, and materials sectors outperformed with trading volume light while communication services and technology stocks lagged. An early indication of holidays sales shows that Americans were ready to spend as MasterCard reported that holiday sales rose 8.5% in December from a year earlier.
Fed News Fuels Market Volatility
Volatility in the equity markets rose last week following the Federal Reserve’s decision to end bond purchases sooner and raised the prospects of rate hikes in 2022. Markets ended the week lower, with the technology-heavy Nasdaq underperforming by a wide margin. As expected, the Federal Reserve accelerated the pace at which it will taper its bond purchasing program but left interest rates unchanged. The outlook for higher interest rates weighed on technology shares while value stock relatively performed better.