It’s been a crazy start to what is expected to be the most pivotal week of market action in the first quarter. The outlook divergence among investors has never been wider as bulls and bears duked it out in the highest volume sessions for US public equities since the pandemic capitulation (March 2020).
Money managers are de-risking their portfolios ahead of the Fed’s first policy meeting of 2022 and taking profits in big tech before their quarterly results are unveiled this week. Fear of a monetary shock coupled with margin pinching inflation fears (specifically regarding wages) is compelling shareholders to reduce exposure to rate-sensitive mega-cap tech names following an incredible nearly 2-year market-buoying rally.
Nevertheless, S&P 500’s break below the critical -10% correction marker (at excessively oversold RSI levels) has cash-heavy market participants putting money back to work. Fundamentals are taking back the stock market after months of euphoria-driven neglect, and this week’s big-tech results could provide an excellent value-powered springboard for recently compressed growth equities.
The Fed’s policy decision and subsequent Powell press conference Wednesday afternoon (1/26) will be the most important event of the week as it will tighten up interest rate expectations, which underpin the valuations of the entire public equity market. As long as nothing shocking transpires, I expect to see a relief rally with Jerome’s market soothing words of a gradual monetary shift.
The Daily Action
High-beta technology stocks were naturally at the forefront of this week’s daily price action, following last week’s consequential selling pressure spilling over. The tech-heavy Nasdaq 100 retreated as much as -18% from its November highs in Monday’s session, less than 2% away from bear market territory (-20% or more decline from recent highs). Still, the selling is beginning to look overdone, and this growth-focused index is poised to bounce out of the excessively oversold RSI levels it’s trading at.
The US 10-Year Treasury yield dipped marginally after touching 1.9% last week, in the all too familiar flight-to-safety rotation, with surging demand for the safety of bonds marginally pressuring yields since last week (out of risk-on stocks and into riskless bonds).
WTI crude oil futures took off to the consensus analyst price target of $85/barrel in the first couple weeks of 2022 trading, which is the price WTI crude will conceivable oscillate around until the next catalyst (likely OPEC’s February meeting next Wednesday).
The VIX, aka the market’s fear gauge, has been on a tear since the year began, opening 2022 around 16 but spiked to nearly 40 in less than 3 weeks as market anxieties took flight in this week’s action (remaining in the 30s).
A New Market
The democratization of individual investing (commission-free trading accessible to anyone with a smartphone) coupled with pandemic boredom has driven millions of eager freshmen traders & investors into the stock market.
Soaring market engagement from capital-infused institutional money managers and amateur traders has completely changed the market dynamics, with hyper-fast high volume momentum trading, highly technically driven daily action, and self-fulfilling prophecies (particularly with technical levels) becoming an industry standard.
For example, investors have been preparing for the S&P 500 to correct for months now (-10% or more pullback from recent high), and most analysts had projected this to occur in earlier 2022, which is precisely what transpired. After the predicted “Santa Rally” concluded on the third trading day of the year, the market began looking for reasons to correct, which isn’t challenging when the pace of inflation is at a 40-year high.
Nevertheless, a self-fulfilling prophecy came to fruition in Monday afternoon’s buying spree once the S&P 500 entered correction territory, which was the buy trigger many market participants had patiently prepped for.
Whether the 4222 low that the S&P 500 hit Monday marks the bottom for public equities will be dictated by the Fed’s policy decisions coupled with mega-cap tech’s Q4 margin results (inflation implications) and forward-looking guidance.
The Week Ahead
We’ve got a formative week of market-moving fundamentals ahead, and with the recent volatility, public equities are more susceptible than ever to any catalyzer (or fear of one).
We are coming to the crescendo of Q4 earnings season as big tech prepares its annual reports while the Federal Reserve determines how to approach these uncharted economic waters as material inflation persists.
The Fed Meeting
This will be new Vice-Chair Leal Brainard’s first time taking her seat beside Fed Chair Jerome Powell. Following her declaration of her dedication to control recently outsized pricing pressures, the markets are looking for a more hawkish tone in this Wednesday’s (1/26) post-FOMC meeting policy statement and subsequent press conference with Jerome.
Fed Chair Jerome and his band of market accommodating central bankers are expected to unveil their 2022 monetary strategy. Market participants are anticipating the Fed will announce a March liftoff, which would kick off a long-awaited period of monetary tightening, following a 40-year high in the pace of inflation.
With the latest Omicron-variant causing prolonged pricing pressures that are officially not “transitory” (Jerome publicly retired the term in the context of inflation), the Federal Reserve is now under the gun to make more aggressive monetary strides towards controlling consumer prices before it gets out of hand.
The credit markets have been franticly raising their 2022 rate hike projections as primarily COVID-related supply chain bottlenecks push back economic recoveries and pressure prices as the Omicron-variant spreads like wildfire. The market is currently pricing for a 60% probability of 4 or more rate hikes by the end of 2022 (each incremental increase represents 25 basis-points).
I believe that these expectations are on the aggressive side, considering how outstandingly market accommodating Powell has been. Powell has done nothing but ensure investors that he intends to ease the US economy into a normalized interest rate environment. I wouldn’t be surprised if the Fed were to reduce the number of rate hikes over the next 12 months but accelerate its asset sheet roll-off for a smoother market transition towards the target sustainable monetary approach (as little interference as possible).
However, incoming Vice-Chair Brainard’s hawkish comments about controlling inflation being her #1 priority in a Congressional hearing earlier this month has traders pricing for the possibility of a monetary shock (unexpected policy changes at the world’s most influential central bank). A monetary shock is one of the few things that would almost certainly impede our currently flourishing economic revival.
The booming US economy has managed to shrug off most of the recent inflation, with customers’ willingness to pay at an all-time high. Still, the potentially severe adverse impacts of rapidly rising prices only show up when this willingness abates.
If the Fed raises rates too quickly, it risks halting demand and catalyzing an economic contraction, but letting prices run too hot for too long could cause much deeper and systemic economic harm.
Fed Chair Powell has done a tremendous job navigating the unchartered monetary waters that the pandemic’s medically-induced economic coma forced upon the world. Jerome’s progressive policy approach has been receiving a growing level of criticism from those worried that this slow and steady monetary tightening strategy will catalyze a period of irrevocable stagflation like that of the 1970s (high inflation, low economic growth).
Chair Powell remains the smartest man in the room. He remains steadfast on his outlook for the natural deceleration of inflation, which I presume will occur once the latest Omicron-driven supply chain tie-ups subside and demands can once again be met.
Mega-Cap Tech Reports
Big tech is finally up to bat as we enter the heart of Q4 earnings season, and these quarterly fundamentals can’t seem to come soon enough, with sellers driving this cohort’s year-to-date returns towards bear market territory (-20% or more off recent highs).
With their recent valuation slips, Netflix’s
NFLX
stock capitulating report last week, and margin compressed results from Wall Street’s leading financiers, investors are looking for these market-buoying beacons of boundless growth to drive fresh fundamental optimism back into this exhausted bull market.
Microsoft
MSFT
, which is trading nearly -20% off its November highs (toeing bear market territory), will be the first of the trillion-dollar club to reveal its year-ending results after the closing bell Tuesday afternoon (1/25). The market is looking for record results, and I see no reason they won’t get them. MSFT has surpassed analysts’ top and bottom line estimates every quarter for more than 5 years as its best-in-class cloud & AI services fuel this innovation-fueled legacy tech giant’s continuous valuation advancement.
Tesla’s
TSLA
incredible market-disrupting growth narrative has catalyzed a tidal wave of investor demand for this EV giant’s shares. Nevertheless, the stock has sizable pulled back from the trillion-dollar valuation milestone it reached in October. TSLA is now trading over 30% below its recent highs but may be in for a bounce when it reports Wednesday after the closing bell (1/26) if Musk can deliver the growth figures he promised in the face of this global chip shortage.
Thursday afternoon (1/27), Apple’s
AAPL
Q4 results will be the single most important December quarter release. The world’s most valuable enterprise (making up 6.8% of the S&P 500 & over 12% of the Nasdaq 100) will give investors integral color on how systemic and material the recent Omicron-fueled inflation rally was/is.
The components of Apple’s market-leading smartphone (and its most significant profit drive), the iPhone, are sourced worldwide, making it an excellent gauge for the real impact that rising prices have on corporate margins. There have been rumors that Apple’s suppliers have had trouble fulfilling order obligations, but we will get the full story before the week concludes.
Abbott
ABT
, Intel
INTC
, AT&T
T
, and Boeing
BA
release their Q4 results on Wednesday (1/26). Visa
V
, Mastercard
MA
, Comcast
CMCSA
, and McDonald’s
MCD
on Thursday (1/27). To conclude this pivotal earnings week, watch out for some of the largest US exporters, Chevron
CVX
and Caterpillar
CAT
.
There is nothing systematically disturbing about the recent market pullback, and I see this healthy correction as an opportunity.
If you still have cash on the sideline, I urge you to begin putting some of that money to work here. Don’t try to call a bottom with any “all-in” trades but rather scale into your favorite stocks by dollar-cost averaging lower if the market continues to slip.
Good luck out there!
Dan
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