By: Jeff Anderson, CFA
This Week: It was another volatile week for the domestic equity markets with the Nasdaq clawing back some more of its early 2022 losses. Small cap stocks continue to lag large cap stocks. Facebook (technically now called Meta Platforms Inc) reported disappointing earnings this week which ended up shedding over $200 billion in market value. Amazon however, reported strong earnings and finished up 9% on the week. It has been a strange earnings season, as companies like Netflix and Facebook fell on hard times while the likes of Amazon, Alphabet and Microsoft reported blow-out earnings. The latter three are more indicative of the state of the economy, while Netflix and PayPal face some company-specific issues, somewhat related to lofty expectations coming out of the pandemic. Facebook specifically is dealing with the fallout from Apple’s software update that allows users to block tracking has put Facebook’s advertising dependent business model in jeopardy, at least for the short-term.
Crude Oil keeps marching higher, closing near $92 per barrel, up 5.3% for the week, and 21.84% year-to-date. Continued geopolitical issues surrounding Ukraine along with strong economic numbers have propelled oil higher.
Investor Bulletin – Corrections are Normal:
The correction to US Equity markets that came swiftly as the new year began is, by historical standards, normal. Oxford Economics studied corrections going back to 1945 and found that the Black Monday crash that occurred in 1987 is the only example of markets correcting more than 20% without any recession to follow. The chart below shows the corrections to the S&P 500 dating back to 1965. You can see that the average correction in which a recession did not follow was -15.4%. Economists are not calling for a recession anytime soon. According to Crandall, Pierce & Co, the average correction for the S&P 500 fell between 10% and 20%. It would be normal market behavior for this correction to reach the typical bottom. But we shall see. The Nasdaq was off nearly 17% before bouncing off its lows on January 27th. It did not breach a 20% correction, which is defined as a bear market. This is not to say that the correction is behind us but rather, to point out that corrections are a normal part of investing in the market.
U.S. Hiring Accelerated as Employers added 467,000 Jobs (WSJ):
Payrolls grew by nearly 500,000 in January. The Labor Department also revised payrolls upwards for November and December of 2021, with more than 700,000 additional jobs created during that period. Service-type jobs and retail added jobs while the auto industry shed jobs. There are still about 3.6 million people who are not working due to illness (mainly Omicron). As the virus subsides this year, many economists are expecting a continued bounce back in jobs, even as the unemployment rate sits at 4%.
With wage increases and demand from employers for more workers, the Fed is likely to raise interest rates. Some economists believe the Fed could raise rates in March by 0.5% instead of the typical 0.25%, as well as raise rates in June and December. Considering this is a mid-term election year, many feel that the Fed will pause in Q3 due to the election and will resume rate hikes in December. We have written about this many times over previous market updates. Nothing is set in stone. The Fed will either dial back rates or will get more aggressive as additional economic data comes in.