February 11, 2022
January was a “bearish” month for the market. The chart above is weekly chart of the Nasdaq 100 Exchange Traded Fund, Symbol “QQQ”. The vertical lines on the chart are year markings. The chart covers a time frame from March 2020 to Friday January 11th. The red line in the price chart is the 10-week exponential moving average, which the market respected for most of this period. We had a 10% correction in September 2021, which lasted a month before turning back up until the end of the year. The correction this past month has been sharper and deeper than September’s correction. Notice on the chart that the Nasdaq 100 is trading in the same price range as it was in September. We will be watching closely to see if the market will stay in this range. Regarding earnings reports, on Friday Factset reported “The index is reporting earnings growth of more than 30% for the fourth straight quarter and earnings growth of more than 45% for the full year. These above-average growth rates are due to a combination of higher earnings in 2021 and an easier comparison to weaker earnings in 2020 due to the negative impact of COVID-19 on a number of industries.” Right now, market volatility continues due to inflation, rising interest rates and the concern over the threat of a Russian invasion of Ukraine.
The VIX Index closed at 27.36 slightly higher than last month at 24.83. A rising VIX is normally bearish for the markets. I prefer the VIX below 20 and a VIX below 15 is more bullish.
Percent of stocks above their 50 day and 200 day moving average: Last month 59% of stocks were above their 50-day moving average, this month only 40% are above their 50-day moving average. Last month 69% of the stocks are above their 200-day moving average, today only 45% are above their 200-day moving average. When 60% of stocks are above their 200-day moving average and the 50-day is rising, that is bullish. A sign of strength would be if the stocks above their 50-day moving average begin to rise higher, and even stronger when the 50DMA is above the 200DMA.
Federal Reserve: The next FOMC meeting announcement will be Wednesday March 16th. There is a 98% expectation that the Federal Reserve will raise rates at least a quarter percent.
Unemployment Rate: Total nonfarm payroll employment rose by 467,000 in January, and the unemployment rate was little changed at 4.0 percent, the U.S. Bureau of Labor Statistics reported February 4th. Employment growth continued in leisure and hospitality, in professional and business services, in retail trade, and in transportation and warehousing.
Inflation Rate: The annual inflation rate for the United States is 7.5% for the 12 months ended January 2022 — the highest since February 1982 and after rising 7.0% previously, according to U.S. Labor Department data published February 10. The next inflation update is scheduled for release on March 10 at 8:30 a.m. ET. It will offer the rate of inflation over the 12 months ended February 2022.
The 10-year Treasury index yield: The rate today is at 1.93%, higher than last month’s close at 1.76%
Trading continues to be choppy. Again, if you have considered refinancing your home, I would suggest you investigate this while mortgage interest rates are still historically low.
To view past Market Newsletters, go to www.freedomcapitalmanagement.com and on the home page you will see recent newsletters and for older newsletters go to the blog page tab at the top of the home page.
In this month’s recap: Stocks fell as rising bond yields, elevated inflation, and a hawkish-sounding Fed took turns rattling investor confidence.
Monthly Economic Update
Presented by Guy Woolley, February 2022
U.S. Markets
Rising yields, elevated inflation, and a hawkish-sounding Fed took turns rattling the stock market in January, with technology-heavy Nasdaq particularly hard hit.
The Dow Jones Industrial Average dropped 3.32 percent, while the Standard & Poor’s 500 Index fell 5.26 percent. The Nasdaq lost 8.98 percent.1
Fear of the Fed
Anxiety about the Federal Reserve’s pivot from its accommodative monetary policy toward monetary normalization hung over the market all month.
Early in the month, the Fed released the minutes from its December meeting, which suggested a more hawkish tone than what investors were expecting.
Inside the Fed minutes, the first update that unsettled markets was the likelihood of an interest rate increase in March, which would be sooner than many had expected. The second update that upset investors was news that the Fed was considering reducing its balance sheet, a step toward tightening that had not been widely anticipated.
More from the Fed
Following its January meeting, Fed Chair Powell indicated that reducing the balance sheet might come at a faster pace than the balance sheet reductions in 2014 and 2018.
Bond yields trended higher in response to Powell’s news. Higher yields hurt technology and other high-valuation companies the most.
Economic Recovery
Amid the stock market turbulence, the underlying fundamentals showed a solid economic recovery. Unemployment fell, housing was strong, and fourth-quarter Gross Domestic Product rose beyond consensus expectations. But hot inflation tempered enthusiasm.
Earnings Underway
A strong start to the fourth quarter earnings season caught investor’s attention. Of the 33 percent of the companies comprising the S&P 500 Index that reported by month’s end, 77 percent reported earnings above Wall Street estimates. While the total “beat” percentage was higher than average, the amount by which earnings actually beat analysts’ estimates was by a narrower margin.2
Stocks rallied sharply in the final two sessions, taking the edge off an otherwise challenging month for investors.
Sector Scorecard
Except for Energy (+17.07 percent), all industry sectors closed the month with losses, including Communications Services (-8.27 percent), Consumer Discretionary (-13.23 percent), Consumer Staples (-1.05 percent), Financials (-1.33 percent), Health Care (-7.07 percent), Industrials (-5.54 percent), Materials (-7.70 percent), Real Estate (-8.48 percent), Technology (-10.09 percent), and Utilities (-3.86 percent).3
What Investors May Be Talking About in February
With the fourth quarter earnings season well underway, investors will continue to focus on earnings reports throughout the month. Expect investors to continue to focus on quarterly reports from high-valuation growth companies.
Earnings from such companies may have a high bar to clear with investors amid expectations for a continued climb in bond yields.
As investors saw in January, these high-multiple stocks can come under pressure as bond yields trend higher. The reason for this is twofold. First, when rates tick up, it’s more difficult to forecast future earnings. Second, higher rates may increase a firm’s cost of capital.
T I P O F T H E M O N T H
Students who want to enter college this fall should complete the FAFSA early in the year to increase eligibility for student aid. After completing it, they should apply for scholarships as soon as possible.
World Markets
Overseas markets fell in tandem with the U.S., as the MSCI-EAFE Index sank 5.76 percent in January.4
Major European markets were broadly lower, with losses in Germany (-2.60 percent) and France (-2.15 percent). The U.K. was the only major European exchange that saw a gain (+1.08 percent).5
Pacific Rim markets were mostly down as well. Australia lost 6.35 percent and Japan dropped 6.22 percent. Hong Kong bucked the trend, gaining 1.73 percent.6
Indicators
Gross Domestic Product: The rate of economic expansion in the fourth quarter exceeded economists’ expectations, rising 6.9 percent—triple the growth rate of the third quarter. While the headline number was strong, two concerns emerged: Much of the growth was due to inventory build-up, and the price index for personal consumption expenditures (an inflation measure) accelerated from the third quarter, climbing 6.5 percent.7
Employment: Hiring slowed in December, with employers adding just 199,000 jobs—well below consensus estimates. The unemployment rate dropped to 3.9 percent, while wage growth rose 4.7 percent from a year ago, signaling a tight labor market. The December jobs report reflects data prior to the start of the Omicron variant spread in late December.8
Retail Sales: Retail sales declined by 1.9 percent. The spread of Omicron and early consumer holiday buying in response to possible inventory shortages dampened spending in December.9
Industrial Production: Industrial production contracted 0.1 percent. This dip was attributed to a decline in auto production and a drop in utility output due to warmer weather.10
Housing: Housing starts rose by 1.9 percent in the final month of 2021, helped by the warmest December on record. This increase occurred despite rising lumber prices and higher mortgage rates.11
Existing home sales slipped 4.6 percent, hampered by a higher year-over-year median sales price (+15.8 percent) and tight inventory.12
New home sales surged by 11.9 percent. With new homes, higher mortgage rates did not discourage buyers.13
Consumer Price Index: Consumer prices rose 0.5 percent in December, with inflation climbing 7.0 percent from a year ago. This year-over-year increase was the highest since 1982.14
Durable Goods Orders: Durable goods orders declined 0.9 percent to their lowest level since April 2020, reflecting the impact of the Omicron surge.15
Q U O T E O F T H E M O N T H
“What lies behind us and what lies before us are tiny matters compared to what lies within us.”
Ralph WALDO EMERSON
The Fed
The Federal Open Market Committee (FOMC) at its January meeting left rates unchanged, though officials signaled that rates would likely be raised at its next meeting in March.
The Fed also approved one last round of bond purchases, bringing quantitative easing to an end by March.
The FOMC did not offer details on its plan to shrink the Fed’s balance sheet. But Fed Chair Powell indicated that shrinking the Fed’s asset holdings may occur at a faster rate than in past periods of balance sheet reductions.16
| MARKET INDEX | Y-T-D CHANGE | January 2022 |
| DJIA | -3.32% | -3.32% |
| NASDAQ | -8.98% | -8.98% |
| S&P 500 | -5.26% | -5.26% |
| BOND YIELD | Y-T-D | January 2022 |
| 10 YR TREASURY | .27% | 1.78% |
Sources: Yahoo Finance, January 31, 2022.
The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results. U.S. Treasury Notes are guaranteed by the federal government as to the timely payment of principal and interest. However, if you sell a Treasury Note prior to maturity, it may be worth more or less than the original price paid.
T H E M O N T H L Y R I D D L E
Add missing vowels to these three trios of letters to get the six-letter names of three different countries: PNM, MXC, KWT.
LAST MONTH’S RIDDLE: The English language has a noun with three consecutive double letters in it. The word is 10 letters long, and it describes a job involving math. What is this word?
ANSWER: Bookkeeper.
Guy Woolley may be reached at 415-236-5364 or guy@freedomcapitalmanagement.com
www.freedomcapitalmanagement.com
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CITATIONS:
1. WSJ.com, January 31, 2022
2. Insight.FactSet.com, January 28, 2022
3. SectorSpdr.com, January 31, 2022
4. MSCI.com, January 31, 2022
5. MSCI.com, January 31, 2022
6. MSCI.com, January 31, 2022
7. WSJ.com, January 27, 2022
8. WSJ.com, January 7, 2022
9. WSJ.com, January 14, 2022
10. MarketWatch.com, January 14, 2022
11. CNBC.com, January 19, 2022
12. CNBC.com, January 20, 2022
13. USNews.com, January 26, 2022
14. WSJ.com, January 12, 2022
15. CNBC.com, January 27, 2022
16. WSJ.com, January 26, 2022