A rocky month, solid Q4 earnings
After a strong December, major U.S. equity indexes experienced a rocky January, on the heels of interest rate uncertainty were concerns about a potential Russian invasion of Ukraine, and of course, the topic on everyone’s mind still, inflation.
Here is the monthly recap as of January 28th: the S&P 500 declined by 7.01%, the Nasdaq 100 shed 11.43%, and the Dow Jones Industrial Average fared the best, declining by 4.44%.
FOMC Provides (Some) Clarity
Heading into the Federal Reserve meeting on January 25th, there was about an 88% chance of a 0.25% rate hike occurring at the March meeting. (The CME Group has a handy tool[i] that shows the probability of future overnight lending rates based on interest rate futures contracts.) The markets wanted confirmation of the March rate hike, however, and they got it.
After citing a strong labor market, the Fed stated, “With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate.”
Since there is no meeting in February, the consensus is for a 0.25% rate hike[ii] in the March meeting. With no additional guidance about future rate hike intentions or timelines beyond March, the Fed did little to ease the ever-present element of uncertainty that remains.
S&P 500 Nears Correction Territory & Q4 Earnings Strength
According to data[vi] released by FactSet, 33% of S&P 500 companies have reported earnings as of January 28th. Of the reporting companies, 77% of companies that have already reported their earnings have beaten their estimated earnings per share. The results thus far are above the five-year average of 76%.
Consumer Inflation Persists
What is not shocking to anyone is the fact that prices of consumer goods remain at high levels.
January’s Consumer Price Index (CPI) data release showed inflation up 7% year-over-year for December,[vii]the highest since 1982. On a monthly basis, prices in December were 0.8% higher than the previous month, above market estimates of 0.4%.
Nonfarm Payrolls Weak
In a harbinger of things to come in January, jobs data for December[ix] was far below expectations: 199,000 added versus expectations ranging between 422,000 and 450,000. The January 7th employment data release did show a better than expected unemployment rate: 3.9% versus 4.1% forecasted.
Wages also increased more than expected — by 4.7% versus 4.2% expected year-over-year. Keep in mind though that this increase is not quite enough for workers to cover yearly inflation, which is running at about 7%.
Now, the focus shifts to the upcoming jobs report on Friday, February 4th. Market forecasts have a low bar set, with expectations for a meager 166,000 to 210,000 jobs added in January. The White House is warning that Omicron could hurt[x] the January jobs report.
Takeaways & Look Ahead
January has featured downward price action in major U.S. indices, as multiple uncertainties (interest rates, Russia, inflation, Omicron) persist. S&P 500 earnings have been good so far, however, and expectations are for positive earnings releases to continue.
Heading into February, it would be a solid win for January jobs numbers to come in higher than expectations. More jobs would provide solid psychology to begin a new month, as the market looks for a reason to gain traction after pulling back. Fed meeting minutes, set to be released on February 16th, will allow the Fed to provide further clarity and reduce uncertainty about the future of interest rates and inflation.
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Disclosure: Emerald Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance. Copyright © Levitate
[i] CME Group. 2022. CME FedWatch Tool. CMEgroup.com. [online] Available at: https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html.
[ii] Ponciano, J. (2022, January 26). Fed Readies March Interest-Rate Hike To Fight Inflation Surge Despite Stock Market Plunge. Forbes.com. https://www.forbes.com/sites/jonathanponciano/2022/01/26/fed-fomc-minutes-interest-rates-stocks/?sh=1bca6e125121
[iii] Baldridge, R. & Curry, B. (2021, May 7). Understanding The 10-Year Treasury Yield. Forbes.com. [online] Available at: https://www.forbes.com/advisor/investing/10-year-treasury-yield/
[iv] Logan, B., Miao, H., & Li, Y. (2002, January 24). U.S. stock indexes rebound from new lows after briefly sinking into correction territory. NBCnews.com. [online] Available at: https://www.nbcnews.com/business/markets/market-slide-dow-falls-700-points-sp-enters-correction-territory-rcna13304
[v] Gopinath, G. (2022, January). Rising Caseloads, A Disrupted Recovery, and Higher Inflation. Imf.org. [online] Available at: https://www.imf.org/en/Publications/WEO/Issues/2022/01/25/world-economic-outlook-update-january-2022
[vi] Butters, J. (2022, January 28). S&P 500 Earnings Season Update: January 28, 2022. Insight.factset.com. [online] Available at: https://insight.factset.com/sp-500-earnings-season-update-january-28-2022
[vii] Cox, J. (2022, January 12). Inflation rises 7% over the past year, highest since 1982. Cnbc.com. [online] Available at: https://www.cnbc.com/2022/01/12/cpi-december-2021-.html
[viii] Emerald Advisors, LLC. (2021, December). The Emerald Way: Risk, Reward, and Inflation. Emeraldadv.com. [online] Available at: https://emeraldadv.com/2021/12/01/the-emerald-way-5/
[ix] Cox, J. (2022, January 7). Hiring falters in December as payrolls rise only 199,000, though the unemployment rate fell to3.9%. cnbc.com. [online] Available at: https://www.cnbc.com/2022/01/07/hiring-falters-in-december-as-payrolls-rise-only-199000.html
[x] Franck, T. (2022, January 28). White House warns that omicron spike could weigh on January’s jobs data. Cnbc.com. [online] Available at: https://www.cnbc.com/2022/01/28/white-house-warns-that-januarys-omicron-spike-could-weigh-on-next-weeks-jobs-data.html
Disclosure: Emerald Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
Copyright © Levitate