January 28th, 2022
It may be the dead of winter, but bears were sniffing around Wall Street this week. The Nasdaq Composite narrowly avoided its fifth consecutive losing week, resulting in the index having now declined -14.24% from its all-time high. Although most of the attention has been on the Nasdaq’s volatility, it was the Russell 2000 small cap index that has been flirting with bear territory, closing the week -19.41% from its all-time high. A bear market is defined as a -20% decline from its peak. This week’s volatility came as the Fed’s rumor became reality. The Federal Reserve made it official at its first FOMC meeting of the year, where it announced a 0.25% rate increase in March 2022. Investors remained anxious even after the announcement due to comments the Fed made suggesting they believe they have ample room to continue hiking to ease inflation. Meanwhile, earnings announcements this week failed to improve investor sentiment, where ongoing supply chain issues and inflationary pressures weighed on corporate bottom lines. Not even a strong Q4 2021 GDP report could get the bulls back in the driver’s seat. A strong earnings announcement from Apple on Friday, however, helped salvage and lift the S&P 500 0.77% for the week.
All eyes were on the Federal Reserve as it held its first FOMC meeting of the year. The Fed announced it would hold interest rates steady and maintain its current pace of tapering, which markets had widely expected. However, the real focus was on the Fed’s March meeting. The Street had been concerned the central bank would surprise the market with a 0.50% rate hike in March in order to take a strong line on inflation. Fortunately, it announced a more modest rate hike of 0.25%, making it the first hike since 2018. The Fed also announced it planned to wind down its bond buying program in March as well. Both of these moves were anticipated, but it was the Fed’s emphasis in commenting that it believes the bank has ample room to continue hiking that left investors wringing their hands long after the meeting had ended.
U.S. Economy Edges Out Omicron
Despite the emergence of Omicron late in the quarter, Q4 2021 U.S. GDP ended the year on a high note. Gross domestic product, the sum of all goods and services produced during the quarter, rose 6.90% in the fourth quarter. That was a strong rebound from Q3 2021’s GDP growth of 2.10%, which had been impacted by consumers pulling back in the wake of Delta. Consumers and businesses spent during the holiday season, which lifted the economy to its strongest full year on record since 1984. Consumer activity, which accounts for more than two-thirds of GDP, rose 3.30% for the quarter. Meanwhile, gross private domestic investments, a gauge of business spending and inventory build, soared 32%. Although the economy managed to post healthy growth in the fourth quarter, the effects of the Omicron strain did not appear in force until late December. Its impact will not be fully reflected until Q1 22’s reading. Traders will be closely scrutinizing January economic data to see just how impactful Omicron will ultimately prove to be, but many economists have started scaling back their estimates to those seen in Q3 21.
Income Lags Behind Inflation
Inflation continues to hit investors in their pocketbooks. Personal income rose 0.30% in December, missing economist estimates of 0.50%. Adjusted for inflation, disposable income fell -0.20% for the third straight month. Personal spending also took a hit in December, falling -0.60%, while inflation continued to heat up. The Fed’s preferred core PCE index rose 0.50% month-to-month. Year-over-year, the Core PCE index accelerated to an annualized 4.90% in December. That’s its highest level since September 1983.
It was clear from this week’s volatility that inflation and rate hikes continue to weigh on investor psyche. Yet, there are a lot of investors willing to bet that the bull market is not quite over. This was evidenced by the sharp buying we saw each time we hit correction territory (-10% from highs) on the S&P 500. The week’s earnings and economic reports were, on balance, a net positive. With a third of the S&P 500 companies having now reported, three quarters of those firms have beaten estimates. Q4’s GDP reading was strong – overly strong if you are concerned about inflation. However, with stimulus declining and retail spending softening, Q1’s growth should slow to more sustainable levels and alleviate some of the demand side pressures contributing to inflation. Ultimately, the confluence of natural forces may begin bringing inflation down on its own, which could keep the Fed from being as aggressive as markets had feared. Slowing growth is rarely a positive, but when faced with high inflation and a hawkish Fed, markets might just find comfort with that as the alternative.
The Week Ahead
Omicron puts the U.S. economy to the test as the Covid variant surged across the country in January. We’ll see the impact on economic data with the latest figures on jobs, manufacturing, and services.
This coming Wednesday, 2/2/22, is Groundhog Day. The holiday is always February 2nd, but this year it will be 2/2/22, which is a palindrome date, meaning it can be read the same way backward and forward. Palindrome dates are popular wedding and event dates, and if 2/2/22 doesn’t pack enough punch, there will also be 2/22/22 in a couple weeks. That date happens to fall on a Tuesday, and, as such, it is being called TWOsday! There’s a t-shirt for it, too. A Google search of “twosday shirt” revealed about 964,000 results. Math enthusiasts, number nerds, and historians must be bursting with anticipation for this once in a lifetime date.
Other popular dates for weddings and celebrations are countdown dates and sequential dates. These are dates that can be written in sequential order, such as 12/13/14. In Las Vegas, the countdown date of 4/3/21 saw roughly 56,000 marriage licenses issued in Clark County, Nevada. Thousands of couples were also married on 10/10/10, 11/11/11 and 12/12/12. If lucky seven is your number, then it might be interesting to know that 4,492 marriages were performed throughout the county of Las Vegas on 7/7/07.
Back to Twosday or 2’s day. People turning 2 or 22 are in for a treat. In addition to 2/2/22 and 2/22/22, there are a number of other palindrome dates this month, including every day from 2/20/22 to 2/28/22.
Twosday (2/22/22) is also National Margarita Day, so perhaps that means make it a double? And, it is also unofficially Taco Tuesday, or should we say Taco Twosday?! Is anyone’s mind blown yet?
If you aren’t tying the knot or planning any big celebrations to take advantage of these interesting dates on the calendar this month, you could wait for 3/3/33, but that is 11 years away. In the meantime, we will be pondering what we will be doing at 2:22pm on 2/22/22..
Important Disclosure: The information contained in this presentation is for informational purposes only. The content may contain statements or opinions related to financial matters but is not intended to constitute individualized investment advice as contemplated by the Investment Advisors Act of 1940, unless a written advisory agreement has been executed with the recipient. This information should not be regarded as an offer to sell or as a solicitation of an offer to buy any securities, futures, options, loans, investment products, or other financial products or services. The information contained in this presentation is based on data gathered from a variety of sources which we believe to be reliable. It is not guaranteed as to its accuracy, does not purport to be complete, and is not intended to be the sole basis for any investment decisions. All references made to investment or portfolio performance are based on historical data. Past performance may or may not accurately reflect future realized performance. Securities discussed in this report are not FDIC Insured, may lose value, and do not constitute a bank guarantee. Investors should carefully consider their personal financial picture, in consultation with their investment advisor, prior to engaging in any investment action discussed in this report. This report may be used in one on one discussions between clients (or potential clients) and their investment advisor representative, but it is not intended for third-party or unauthorized redistribution. The research and opinions expressed herein are time sensitive in nature and may change without additional notice.