Under the Gun

Mar 14, 2022

By Pete Biebel, Senior Vice President

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Both our stock market and our bond market misfired again last week. The worsening geopolitical situation put the caliber of our markets to the test. The blowback began early in the week as the price of a barrel of crude oil shot up to new highs in the mid-$120s Monday morning. The major averages ricocheted off opening gains and barreled lower, ending the session with their worst daily losses of 2022. Follow-through losses early Tuesday established the range for the week as stocks recoiled and rebounded through the afternoon. The balance of the week was a wild, wild West of market action that yielded little net new change.

The Nasdaq Composite Index (COMP) suffered the worst ballistics of the week, losing about 3.5% and increasing its net loss for the year to nearly 18%. The S&P 500 Index (SPX) had a slightly better trajectory. It lost about 2.9% for the week, bumping its year-to-date net loss to nearly 12%. Because the scope of the Dow Jones Industrial Average (DJIA) is relatively lighter in technology stocks and relatively heavier in energy companies, it was a sight better than its peers last week. DJIA lost a tick less than 2%, so its YTD loss now stands at a little over 9%.

Consumer Discretionary (-2.84%), Communication Services (-3.19%) and Technology (-3.80%) were again among the poorer performing sectors. Perhaps the biggest surprise in sector performance was Consumer Staples. That sector, which is typically characterized as one of the more defensive groups of stocks, was showing a year-to-date loss of less than 2% coming into the week. Unfortunately, many of the biggest names in the sector fell into the crosshairs of the fallout from the Russia/Ukraine conflict. The big, multinational consumer companies that halted their operations in Russia are at risk of having their assets in that country confiscated by the Russian government. What had been ceased might now be seized. The S&P Consumer Staples Sector Index fell by nearly 6% last week, causing its YTD loss to mushroom to a little over 7%.

The bond market also took a powder last week. Where the initial response to the Ukraine invasion was a flight to safety that triggered a rush of buying in Treasuries and forced the 10-Year yield down from just above 2% into the low-1.70%s, renewed inflation fears put a muzzle on that buying last week. Higher prices in many commodities including crude oil, gasoline, gold and wheat were an early-week reminder of the persistence of the current bout of inflation. The 10-Year yield was back above 1.9% by midweek. Then, on Thursday morning, the latest reading on the Consumer Price Index showed a year-over-year increase of 7.9%, the highest reading in 40 years. The 10-Year yield spiked above 2.0% that morning and ended the week very near that level.

The combination of persistent inflation, likely Fed rate hikes and slowing economic growth put a bull’s eye on the market early in the year. For the first time in a long time, the market had a lot to worry about. Then, a couple weeks ago, the initiation of hostilities in Ukraine became an additional complication to that consternation. So far, there’s been nothing in market action to indicate that the concerns are subsiding.

In fact, the violent swings throughout last week are another symptom of a fragile market.  SPX was down 2.9% last Monday, up 2.6% on Wednesday and down another 1.3% on Friday.  That level of volatility doesn’t happen during uptrends. And the gap openings, both higher and lower, are likely to continue over the near-term. Overnight news will continue to have the potential to trigger oversized reactions in the stock index futures markets.

Having been rejected at the 4300 level several times last week, SPX ended in the lower end of its range for the week at 4204. That is its lowest weekly close in about nine months. The index would need to climb back above the 4400 level to eliminate the current bearish bias. Lower lows seem more likely. Another 3% to 5% lower doesn’t seem like a stretch.  That would drop SPX into the 4000- 4100 area where it was trading about a year ago.

The good news is that the market has thrown out the baby with the bath water. In addition to numerous wildly overvalued stocks finally getting their comeuppance, the stocks of many fine, fundamentally solid companies have also come under fire. On our internal Research call last week, we counseled our advisors that numerous big-name stocks with strong balance sheets and enviable dividend histories had already declined to what seemed to be bargain levels.

Traders will be cocked and locked coming into Wednesday afternoon’s FOMC policy announcement. Their aim will be on trying to gauge the Fed’s priority with respect to how aggressively it will battle inflation at the risk of stalling a fragile economic recovery. A 25-basis point increase in their target intrabank lending rate is expected. Analysts will use the policy statement and the subsequent press conference to try to zero-in on the Fed’s intentions with respect to how aggressively it might begin to reduce its swollen balance sheet.

Developments in and around the conflict in Ukraine will likely continue to be the primary drivers of market action in the next week or two. The current earnings season is nearly complete. We’ll get reports from eight to ten companies each day, but none of them will be from those large enough to have any impact on the overall market. The Producer Price Index report on Tuesday seems to be the key piece of economic data this week. Friday will bring the first of the quarterly quadruple futures and options expirations this year. It will very likely be one of the highest volume days of the year, but not necessarily highly volatile.

Date Report Previous Consensus
Monday 3/14/2022 No Reports Scheduled
Tuesday 3/15/2022 Producer Price Index, February, M/M +1.0% +1.0%
PPI ex-Food & Energy, February, M/M +0.8% +0.6%
PPI, February, Y/Y +9.7% +10.0%
PPI ex-Food & Energy, February, Y/Y +8.3% +8.3%
Empire State Manufacturing Index, March 3.1 8.0
Wednesday 3/16/2022 Retail Sales, February, M/M +3.8% +0.4%
Retail Sales ex Vehicles & Gas, February, M/M +3.8% +0.6%
Import Prices, February, M/M +2.0% +1.5%
Export Prices, February, M/M +2.9% +1.3%
Business Inventories, January, M/M +2.1% +1.1%
FOMC Policy Announcement and Press Conference
Thursday 3/17/2022 Initial Jobless Claims 227K 218K
Housing Starts, February, SAAR 1.638mm 1.700mm
Building Permits, February, SAAR 1.899mm 1.850mm
Philadelphia Fed Manufacturing Index, March 16.0 15.0
Industrial Production, February, M/M +1.4% +0.5
Friday 3/18/2022 Existing Home Sales, February, SAAR 6.500mm 6.170mm
Leading Indicators, February, M/M -0.3% +0.2%
Quadruple Expiration for Stock & Index Options & Futures


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