Split Decision

Jan 31, 2022

By Pete Biebel, Senior Vice President

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In the week following the Martin Luther King holiday, the stock market suffered body blows in each of the four sessions. The market was punch-drunk, and stocks were on the ropes when last week began. As the market staggered into the opening last Monday morning, it got hit with a haymaker and dropped like a stone. The major averages were showing loses of 4% to 5% within the first 90 minutes of trading. No referee stepped in, but the selling pressure eased off enough for stocks to recover their bearings. In that very oversold condition, the market was able to maintain its footing and begin to counterpunch. The rebound gathered strength in the last hour of the session, enabling the averages to erase all of their morning losses by the end of the day.

The averages continued to attempt to fight back in each of the following three sessions, but in every case, they got knocked to the canvas late in the round. Coming into Friday, from ringside, the week was looking like a disappointing bout. Given the oversold condition and the opportunity to rebound following the reversal on Monday, the market acted like a punched-out palooka. The fisticuffs on Friday were far more rewarding. The averages fought higher through most of the session, finishing with a flurry in the final 90 minutes that lifted the averages to near their highs of the week.

The market’s recovery following its standing eight count on Monday failed to land any big punches. If bullish weeks were in our future, then stocks should have made much more progress through the second half of last week. But it is also true that, given the market’s midweek failures, the bears could have easily delivered a knockout punch by pushing the averages below their Monday lows. But those lows remained untested. If bearish weeks were in our future, then stocks should have at least challenged those lows.

So, the week ended with a split decision. The NASDAQ Composite Index (COMP) rope-a-doped through the week to a net gain of 0.01%. The S&P 500 Index (SPX) scored a 0.77% gain. On the undercard, the Russell 2000 Index of small-cap stocks (RUT) continued to lead with its chin. RUT lost another 1.12% for the week and is now down nearly 13% year-to-date. COMP’s YTD loss is about 12%, but the more significant stat for those two indices is the size of their declines from their late-2021 highs. COMP is now about 15% below its record high reached in late-November. RUT’s peak was a couple weeks earlier; RUT’s closing level on Friday was 20% below its high. Because it was less affected by the deterioration of market breadth in late-2021, SPX was able to continue higher in November and December, and officially peaked on the first trading day of 2022. So, year-to-date, SPX has lost about 7%, which coincides with its gap from its all-time high.

Interest rates, and more precisely spikes in interest rates, continue to knock the stock market on to its heels. The spike in the 10-Year Treasury rate from 1.53% to 1.63% on Jan. 3, 2022 was responsible for about a 100-point loss in SPX that day, a decline that triggered the technical and mechanical selling that followed. On the Tuesday following Martin Luther King Day, the 10-Year rate shot up to 1.86%, and four consecutive days of losses for SPX followed. Again, last week, during and following Chairman Jerome Powell’s press conference, the 10-Year rate shot up from 1.78% to 1.85%, which triggered a 3.3% plummet in SPX that afternoon.

Not pulling any punches, the Energy sector carded a 5.09% gain for the week, more than double the gain in the second-best sector: Technology. The Energy sector has now gained about 18% in the new year. It’s the only U.S. equity sector with a positive return year-to-date. The continuing rally in crude oil prices has certainly been a catalyst. Crude, which was trading near $76 per barrel at the beginning of the month, ended Friday near $87, reaching that level for the first time since 2014.

While the Energy sector has been punching above its weight, the Consumer Discretionary sector has been a punching bag. That sector trails all others with more than a 12% loss year-to-date. One stock, which accounts for about 19% of the sector’s weight, was down 10% last week and has lost 20% year-to-date. Another weak spot in the sector is stocks of homebuilders. The S&P Homebuilders Index has lost about 15% since Dec. 31, 2021. The potential for higher interest rates (and mortgage rates) combined with lower supply and narrower margins has staggered those stocks in recent weeks.

If there’s some good news in the market’s January slide, it’s that much of the excess that was pumped into stock prices during 2021 has already drained out. Last year witnessed exuberant speculation, not only in some of the leading mega-cap stocks, but also in meme stocks, electric vehicle companies and some of the shelter-at-home beneficiaries. Many of those hyper-inflated stocks had already suffered declines of 30%, 40% and even 50% through the final months of 2021.

More good news is that S&P 500 corrections usually turn out to be good buying opportunities. A report from Goldman Sachs observes, “There have been 33 S&P 500 corrections of 10% or more since 1950. The median episode has lasted roughly 5 months and encompassed a peak-to-trough decline of 18%. An investor buying the S&P 500 10% below its high, regardless of whether it was the trough, would have gained a median return of 15% during the subsequent 12 months (positive 76% of the time).”

SPX ended last week near 4432, essentially right at its 200-day moving average. Sustained trading above that level would establish a short-term rebound target in the 4500 – 4550 range, though progress beyond that range seems doubtful over the next few weeks. Last Monday’s low was near 4223, while the lows on each of the next four days were near the 4300 level. I suspect that if the 4300 level is knocked out in the next week or two, that 4223 level could quickly follow.

This will be a heavyweight week for economic reports and earnings announcements. Early in the week, analysts are expecting small upticks in manufacturing activity. We’ll get employment numbers on four successive days, from the JOLTS data on Tuesday through the Nonfarm Payroll and Unemployment Rate numbers on Friday. The Unit Labor Costs report rarely has market-moving potential, but analysts expect a large reduction in the rate of labor cost inflation to be reported on Thursday. If that report shows the rate of increase is still in the high single-digits, then it could roil both the bond market and the stock market.

With so many earnings announcements scheduled this week, it should be a good week to watch for any bias in the market’s reaction to the reports. So far this earnings season, results have come in about 5% better than expected. But this will be the third successive quarter in which the size of those percentage “beats” has declined. In addition to the decline in relative beats, there has also been a steady decline in the rate of earnings growth. Those trends haven’t been unexpected, but if the guidance on future revenue and margin expectations is disappointing, those stocks are likely to take a dive.

Date Report Previous Consensus
Monday 1/31/2022 Chicago PMI, January



Dallas Fed Manufacturing Survey, January



Tuesday 2/1/2022 PMI Manufacturing, January



ISM Manufacturing, January



Construction Spending, December, M/M



JOLTS Job Openings, December



Wednesday 2/2/2022 Motor Vehicle Sales, January, SAAR



ADP Employment Report, January, M/M



Thursday 2/3/2022 Initial Jobless Claims



Nonfarm Productivity, Q4, SAAR



Unit Labor Costs, Q4, SAAR



PMI Composite, January



Factory Orders, December, M/M



ISM Services Index, January



Friday 2/4/2022 Nonfarm Payrolls, January, M/M



Unemployment Rate




Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.