By Pete Biebel, Senior Vice President
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I recently flew to California for a company event. Fortunately, I was able to get a non-stop flight. Unfortunately, that meant four hours with my only sustenance being a little bag of chips and a small cup of soda. As we approached our destination, the plane encountered some violent bouncing and jouncing, indicating that we had apparently entered a pocket of turbulence. As we crossed over the beginning of the runway, the plane continued to bounce and jounce and bounce and jounce and refused to land. In reality, it was probably only a matter of seconds, but passengers were keenly aware that we were rapidly hurtling over a rapidly shortening runway.
Finally, with a jolting “KA-BOOM,” we achieved what is aeronautically and optimistically referred to as “touch down.” The pilot (or at least someone in the cockpit who was still conscious) immediately reversed the thrusters and slammed on the brakes. I imagine that the rate of deceleration we experienced over the next few seconds was roughly that of a jet landing on an aircraft carrier. No doubt, some shifting of contents occurred in the overhead bins. As the plane slowed to a taxiing speed, a flight attendant, tongue-in-cheek, helpfully but needlessly announced over the PA, “We’re here!”
The stock market had a scary descent of its own through April, punctuated by a harrowing plunge last week. It seems that the stock market’s prognosis of the Fed’s ability to pull off a soft landing for the economy is also declining rapidly. The Fed has backed itself into a position where it will need to increase its target lending rate very aggressively in an effort to choke off persistent inflation. As the odds increase that the Fed’s “soft” landing will be more of the “kaboom” variety, the odds that a suddenly slowing economy will hurt corporate profits will probably also increase.
Investors are wondering how much further and how much longer stock prices can fall. Many have been sitting on a cash stockpile waiting for better buying opportunities to come. We know that it will be many, many months before the Fed’s landing will be accomplished, but it’s also reasonable to expect that the market averages will likely have bottomed well before then. In other words, as was the case two years ago, the market averages will very likely see their lows before the economy hits bottom. While last week’s market decline may have felt like the kaboom landing for the market indices, the overall market momentum and volatility suggest there are probably some additional declines to come.
Unfortunately, nobody is going to announce, “We’re here!” on the day the market lands at its ultimate low. Disciplined investors might plan to watch for buying opportunities and deploy cash gradually in high-quality companies as one-by-one their stocks approach bargain prices. Many individual stocks will see their lows well before the overall market does. Likewise, investors who buy funds rather than individual stocks might establish a plan to begin a gradual allocation by buying a fixed dollar amount of the fund(s) each month over the next three to six months.
Surprisingly, the best day last week was Thursday. That morning, the report on first-quarter GDP showed a 1.4% decline when a 1% increase had been expected. In a skittish market, that kind of news could have been devastating. A quick peek below the headline numbers revealed that much of the weakness was due to declines in Net Trade and Inventories. The far more significant consumption component (referred to as Real Private Domestic Final Sales) saw a better-than-expected increase of 2.7%, a couple ticks higher than consensus. So, what might have been very bearish news wound up with a bullish spin; that more bullish interpretation of the news along with several positive earnings reports that morning helped the averages to open sharply higher.
For the week, the month and the year-to-date, the Dow Jones Industrial Average (DJIA) has had the shallowest decline of the major indices. Thanks largely to its relatively light weighting in technology stocks, DJIA fell just 2.5% last week, increasing its loss in April to 4.9% and its YTD loss to 9.3%. The S&P 500 Index (SPX) is now down a little over 13% this year after falling 3.3% last week and more than 9% for the month. The Nasdaq Composite Index (COMP) fell nearly 4% for the week and is now down more than 21% in 2022. For DJIA and SPX, April was their worst month in two years; for COMP (-13.3%), it was the worst monthly performance since 2008.
Through the first four months of the year, 360 (71%) of the 505 stocks in SPX have net YTD losses; 147 of them have losses of more than 20%. For COMP, it’s a similar picture: 3,586 (75%) of its 4764 stocks are down for the year and 1178 of them are down more than 20%.
Last week was the marquee week for earnings reports and the responses thereto. It was a loud and clear reminder that earnings season giveth, but it can also taketh away. Some previously beaten down stocks including Meta Platforms (FB) and PayPal Holdings (PYPL) gained more than 10% following their quarterly reports. Some of the more prominent big losers were Amazon.Com (AMZN), Apple Inc. (AAPL) and Colgate Palmolive Co. (CL). So far, the first-quarter earnings have come in a bit ahead of consensus, but the year-over-year gains are much lower than in recent quarters.
All U.S. equity sectors had losses for the week. The worst-performing sectors were the ones in which many of those big losers are heavily weighted components. The Consumer Discretionary sector was the biggest loser, down more than 7% for the week.
The stock market’s volatility may be the result of, or the excuse for, heightened volatility in interest rates, energy prices and currency exchange rates. The yield on the benchmark 10-year Treasury note ended the week near 2.89%, about where it ended the previous week, but it was far from an uneventful week. That yield sank from about 2.9% to near 2.72% in the first day-and-a-half of the week. It then shot higher over the next three sessions, touching 2.93% early Friday before easing lower later that day. Higher interest rates contributed to continuing strength in the U.S. Dollar. The Wall Street Journal U.S. Dollar Index began April near $98.60 and began last week near $101.50. That index reached its highest level in two years on Friday, ending the week at $103.21.
The stronger Dollar did little to hold back energy prices. Front-month Crude Oil futures dipped from just over $100 into the mid-$90s early in the week, then rallied to touch $107 early Friday. The Energy sector see-sawed through the week, ending with a net loss of about 1.4%. That sector is still up more than 35% year-to-date. Only one other U.S. equity sector has a YTD gain: The Consumer Staples sector, despite a 2% loss last week, is still holding on to a slim YTD gain of 0.69%.
The late-April decline pushed the market averages into oversold territory. But while a reflex rally seems likely, it would need to power through resistance in the SPX 4200 – 4250 range in order to demonstrate more than temporary staying power. Based on the market’s downtrend channel and the size of previous moves, my downside target for SPX over the next several weeks is 3950 – 4000. I believe that if the index falls into that range soon, it could represent a good short-term buying opportunity.
As the earnings season continues, this week will see a shorter list of companies reporting and fewer mega-cap names. We can expect a flurry of volatility Wednesday afternoon when the Fed policy announcement is made and as Chairman Powell’s press conference airs. A 50-basis point increase in the Fed’s target rate is widely expected. If the Fed surprises with a 75-basis point hike and/or announces a more rapid balance sheet runoff, the stock market might react positively, heartened by the more aggressive catch-up action. The various employment numbers late in the week are likely to be the key economic reports for the markets.
| Date | Report | Previous | Consensus |
| Monday 5/2/2022 | PMI Manufacturing, April | 59.4 | |
| ISM Manufacturing Index, April | 57.1 | 58.0 | |
| Construction Spending, March, M/M | +0.5% | +0.8% | |
| Tuesday 5/3/2022 | Motor Vehicle Sales, April, SAAR | 13.3mm | 13.9mm |
| Factory Orders, March, M/M | -0.5% | +1.1% | |
| JOLTS Job Openings, March | 11.266mm | 11.270mm | |
| Wednesday 5/4/2022 | ADP Employment Report, April, M/M | +455K | +398K |
| International Trade, Trade Deficit, March | $89.2B | $106.5B | |
| ISM Services Index, April | 58.3 | 58.9 | |
| FOMC Policy Announcement and Press Conference | |||
| Thursday 5/5/2022 | Initial Jobless Claims | 180K | 178K |
| Nonfarm Productivity, Q1, SAAR | +6.6% | -2.5% | |
| Unit Labor Costs, Q1, SAAR | +0.3% | +6.8% | |
| Friday 5/6/2022 | Nonfarm Payrolls, April, M/M | +431K | +400K |
| Unemployment Rate, April | 3.6% | 3.6% |
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.