By Pete Biebel, Senior Vice President
Through much of March, the stock market seemed to have come to grips with the prospect of higher interest rates. Many of the big-name tech stocks enjoyed big rallies out of oversold conditions even as interest rates edged higher. Though there were certainly many uncertainties in the road ahead, the market seemed comfortable with the Fed’s playbook. Then last week, when a very dovish Fed Governor called for more aggressive hikes, and the Fed minutes called for aggressive balance sheet reduction, the markets were thrown off guard by the sudden change in plans.
The most obvious impact was in the bond market. The yield on the benchmark 10-Year Treasuries, which ended March around 2.33%, ended last week around 2.72%. It was not only a very large increase in a very short time, but it was also the highest that yield has been in more than three years.
Following big gains last Monday, most of the damage in the stock market occurred on Tuesday (the day of Fed Governor Brainard’s comments) and Wednesday (the day of the release of the Fed meeting minutes). The Dow Jones Industrial Average (DJIA) held up the best, losing just 0.28% for the week. The S&P 500 Index (SPX) retreated 1.27% while the Nasdaq Composite Index (COMP) lost about three times as much, falling 3.86% for the week. The Russell 2000 Index of small-cap stocks (RUT) was, again, the poorest of the four. RUT lost 4.56%.
And most of the damage was in the “growthier” stocks. One index that tracks just the growth stock subgroup of the S&P indices lost about 3% for the week. The counterpart index, which tracks just the value stock subgroup, actually gained about 0.5% last week. The growthier industry sectors, Technology and Consumer Discretionary, were each down between 3% and 4% net for the week. Those losses were especially grim considering that both sectors began the week with one-day gains of about 2%. News that Elon Musk had taken a relatively large stake in a social networking company was largely responsible for the rallies that day.
The price of a barrel of crude oil spiked back up to about $105 early last week but dribbled lower to end the week about where it had begun, near $98. Nevertheless, the S&P Energy Sector Index rose another 3.2% for the week, ending near its high of the week and at its highest closing level in seven years. Energy continues to lead all other U.S. equity sectors with a year-to-date gain of more than 43%. Higher crude oil prices have been a boon for energy companies, but they’ve been a bane for companies that consume a lot of fuel. Over the past two weeks, as the prices of gasoline, diesel and jet fuel have gushed higher, the Dow Jones Transportation Average, which includes airlines, railroads, trucking and delivery companies, has tanked 13% in that time. The index ended the week at its lowest closing level in six months.
In addition to Energy, three other U.S. equity sectors now have net gains for the year. The S&P Healthcare Sector Index has been a shot in the arm for the overall market over the past seven weeks, climbing nearly 13% since its late-February closing low. Last week that sector topped the charts with a 3.45% gain, lifting it to a net year-to-date increase of 1.38%. The Consumer Staples sector also climbed out of the red for the year. Last week’s 2.7% gain boosted the sector to just over a 2% gain for 2022. And, in a bit of a shocker, the Utilities sector charged another 1.93% higher on the week, increasing its YTD gain to 7.52%.
What’s surprising about the performance of Utilities is that the sector typically has a more bond-like character. It’s viewed as a bunch of low-growth stocks with fat dividends that traditionally lose value when interest rates increase. The relatively sparkling performance of the group in the face of sharply higher interest rates is another symptom of the market’s recent allergy to stocks of high-growth companies. Investors seem to have chosen to seek relief in the more defensive sectors. That also helps to explain the strong relative performance of Consumer Staples and Healthcare. All three sectors seem to be among the safer remedies in response to a bout of inflation.
The late-March rebound generated optimism that the market might sprout a bountiful springtime rally. Unfortunately, the early-April losses have pruned back those budding hopes. Last week’s loss dropped SPX back below its 200-day moving average which begins this week near 4493. If SPX sees sustained trading below that level this week, then it needs to hold in the 4425 – 4450 range. Falling significantly below that level would greatly increase the odds for at least a retest of the February and March lows. Climbing back above the 200-day early this week would be a welcome improvement, but the index really would need to clear the 4600 level to rekindle hopes for a new high.
In addition to this being a holiday-shortened week, another reason it seems so pleasin’ is the beginning of Earnings Season. Yes, it’s back. In typical fashion, the season kicks off this week with a sprinkling of reports, mainly from big banks. The real monsoon of earnings releases is still a couple weeks away.
Every earnings season brings some lightning strike reports that buffet individual stocks. This season, any shocker earnings announcement from a single company could have an impact on others in the same industry. Analysts will be trying to gauge how well a company’s profit margins are going to hold up in an inflationary environment. They’ll assess whether the recent quarter’s profitability is likely to improve or diminish in future quarters, whether higher raw material prices and labor costs can be passed along to customers, and whether higher prices will have a material impact on demand for the company’s products. Bad news from a single company could have ripple effects. Not only might analysts reduce their estimates of the company’s future profitability, but they might also lower estimates on other companies in the same industry.
Two economic reports that could rain on the market’s parade this week are the CPI and PPI numbers. Any indication of higher-than-expected inflation will likely dampen the market’s mood. A reminder to any option traders: Due to the market’s closure on Good Friday, the last day of trading for expiring April options will be this Thursday, April 14.
|Monday 4/11/2022||No Reports Scheduled||$107.6B||$106.0B|
|Tuesday 4/12/2022||NFIB Small Business Optimism Index, March||95.7||95.0|
|Consumer Price Index, March, M/M||+0.8%||+1.1%|
|CPI, ex-Food & Energy, March, M/M||+0.5%||+0.5%|
|CPI, March, Y/Y||+6.4%||+6.6%|
|Wednesday 4/13/2022||Producer Price Index, March, M/M||+0.8%||+1.1%|
|PPI, ex-Food & Energy, March, M/M||+0.7%||+0.5%|
|PPI, March, Y/Y||+10.0%||+10.6%|
|Thursday 4/14/2022||Initial Jobless Claims||166K||175K|
|Retail Sales, March, M/M||+0.3%||+0.6%|
|Retail Sales, ex-Vehicles & Gas, March, M/M||-0.4%||-0.1%|
|Import Prices, March, M/M||+1.4%||+2.2%|
|Export Prices, March, M/M||+3.0%||+2.2%|
|Business Inventories, February, M/M||+1.1%||+1.3%|
|Consumer Sentiment, April||59.4||58.8|
|Friday 4/15/2022||Stock & Bond Markets Closed – Good Friday|
|Empire State Manufacturing Index, April||-11.8||+2.0|
|Industrial Production, March, M/M||+0.5%||+0.4%|
|Manufacturing Output, March, M/M||+1.2%||+0.6%|
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.