By Pete Biebel, Senior Vice President
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Last week, the major averages were angling to add to their recent gains to demonstrate that the prior week’s wahoo rally was no fluke. Although the gains for the week were relatively bleak, in light of the potential drag on stocks from the continuing surge in interest rates and the continuing siege in Ukraine, they weren’t too crappie.
The Russell 2000 Index of small-cap stocks was the sole loser among the broad indices, sinking 0.57% for the week. The major averages all rose to a new rebound perch, led by the Nasdaq Composite Index (COMP, +1.98%). The S&P 500 Index (SPX) reeled in a gain of 1.79% while the Dow Jones Industrial Average (DJIA) was able to net a mere 0.31% gain.
While the quantity of last week’s rally was less than that of the previous week, the quality was much better. Some of the fishiness of the big rally two weeks ago arose from the fact that most of the biggest gainers that week were among the biggest losers year-to-date. Stocks of companies involved in disruptive technologies, cloud computing, social networking and genomics caught gains of 20% to 30% in just that one week, but they had been so far under water that, even after those spikes higher, they are still down by 20% to 30% for the year. Last week’s big winners left nothing to carp about. Many of the mega-cap tech stocks, which led the averages higher in 2021, but which wallowed lower through early 2022, landed big gains last week.
Following hefty losses through the first nine weeks of the year, things were getting jiggy. Sentiment had become overly bearish, and the averages were deeply oversold. The market was overdue for a rebound. In the past two weeks, SPX has retraced 61% of its loss from its early-January high to its late-February low. Even with that rebound, SPX is 4.68% in the red year-to-date. COMP has retraced just 44% of the loss from its late-2021 high to its early-March low and is still down a bit less than 10% for the year. Now the issue is whether the two-week rally marked the beginning of a new intermediate-term uptrend or was merely an impressive bounce in a soon-to-be continuing downtrend.
Developments around the war in Ukraine have the potential to induce major swings in the market. The conceivable scope and significance of any such developments are beyond the market’s ability to discount them in advance. The market will deal with them if/when significant developments occur. The future events that are within the market’s capability to anticipate (and price-in) include Fed actions (rate hikes and balance sheet sell-off), slowing economic growth and persistent inflation. In other words, the market will focus on what it can predict and conveniently ignore the unpredictable. If nothing else, the price action last week suggests that the market is comfortable with the current state of affairs.
One feature of recent trading, which suggests that the market’s anxiety regarding Fed policy has faded, is that high-growth tech stocks have been able to rally even in the face of steeply rising interest rates. The yield on the benchmark 10-Year Treasuries spiked from near 2.0% to near 2.5% in the past two weeks. In recent years, that sort of spurt in interest rates would have dragged down growth stocks, but instead, over that time, the S&P Technology Sector Index has gained about 10%. The only other recent occurrence of such a divergence was last October. During that month, as the Fed announced its accelerated intentions for tapering and hiking, the 10-Year rate climbed from near 1.3% to very near 1.7% while tech stocks gained about 8%. I suspect that now, as the case was then, traders are not necessarily pleased that rates were higher, but they appreciate that the Fed is going to take serious steps to rein in inflation.
The rising price of crude oil has been chum for the inflation sharks in recent weeks, and it created another feeding frenzy last week. After dipping back into the mid-$90s in the prior week, the price of a barrel of crude gushed back to near $115 late last week. The rebound in crude prices helped to fuel a rebound in Energy sector stocks. That sector gained about 6.6% last week and led all other U.S. equity sectors. Next best was the somewhat related Materials sector, which tacked on 3.7% for the week.
Only two of the U.S. equity sectors had net losses last week. Higher interest rates contributed to a 0.21% depreciation in the Real Estate sector. The year-to-date loss for that group now stands at a bit over 9%. The Healthcare sector also had a small loss for the week. That sector lost 0.53%, boosting its YTD loss to about 3.3%.
So far, the rebound in SPX is just enough to keep things in doubt. The good news is that the downtrend line off the January high has been broken and, where the index stalled at its 200-day moving average in the prior week, it spent most of last week above that level. Friday’s closing level at 4543 is about 1.5% above the 200-day, which begins this week near 4478. Climbing above the 4600 level would put SPX above its February recovery highs and greatly increase the bullishness of the present set-up. This week could see some backing and filling without doing any technical damage but falling below the low of last week near 4425 would be the first cautionary signal.
In addition to brining the final days of the first quarter, this week also brings a lengthy and potentially disruptive economic report calendar. The GDP data on Wednesday is the first report that might rock the boat. The employment numbers on Thursday and Friday also have the potential to be disruptive.
| Date | Report | Previous | Consensus |
| Monday 3/28/2022 | International Trade in Goods, Trade Deficit, February | $107.6B | $106.0B |
| Wholesale Inventories, February, M/M | +0.8% | +0.7% | |
| Dallas Fed Manufacturing Survey, March | 14.0 | 12.5 | |
| Tuesday 3/29/2022 | Case-Shiller Home Price Index, January, M/M | +1.1% | +1.0% |
| Consumer Confidence, March | 110.5 | 107.0 | |
| JOLTS Job Openings, February | 11.263mm | 11.100mm | |
| Wednesday 3/30/2022 | ADP Employment Report, March, M/M | +475K | +438K |
| GDP, Final Est., Q4 2021, Q/Q, SAAR | 7.0% | 7.1% | |
| Personal Consumption Expenditures, SAAR | +3.1% | +3.1% | |
| Thursday 3/31/2022 | Initial Jobless Claims | 187K | 195K |
| Personal Income, February, M/M | 0.0% | +0.5% | |
| Personal Spending, February, M/M | +2.1% | +0.5% | |
| PCE Price Index, February, Y/Y | +6.1% | +6.4% | |
| Friday 4/1/2022 | Non-Farm Payrolls, March, M/M | +678K | +155K |
| Unemployment Rate | 3.8% | 3.7% | |
| PMI Manufacturing Index, March | 58.5 | ||
| ISM Manufacturing Index, March | 58.6 | 58.6 | |
| Construction Spending, February, M/M | +1.3% | +1.0% |
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.