In this week’s Monday Market Insights, we discuss the recent market rally, provide a preliminary review of the earnings reports released thus far this quarter, and delve into the 4th quarter 2021 GDP report. In our Chart of the Week, we highlight the divergent performance of “FANG” stocks. In the Commentary section, we discuss the level of negativity captured in consumer sentiment measures.
- Equity Markets Claw Back Losses – Equity markets got off to a rough start in 2022 by posting their worst monthly return since March 2020. The S&P 500 Index fell over 5% in January but managed to outpace the technology laden NASDAQ and Russell 2000 Index (proxy for small caps), which declined 9% and 9.6%, respectively. We have commented in the past that a correction was probably overdue given the S&P 500 Index had not traded below its 200-day moving average since May 15, 2020 (438 trading sessions!). Investor sentiment, as measured by surveys and option market data, was quite pessimistic leading up to the January 26 Federal Open Market Committee (“FOMC”) meeting. Equity markets bottomed the following day. A combination of strong earnings reports from bellwether mega-cap stocks (Apple, Visa, Microsoft) and less hawkish rhetoric by a few high-ranking members of the Fed helped spark a 4-day rally that caused stocks to recoup a large portion of losses registered in January. Although we don’t know if this round of market volatility has ushered in a bottom, we still believe that a combination of slowing but steady economic growth and gradual dissipation of inflationary pressures will prevent a routine market correction from turning into something that is much more ominous.
- Earnings Still Matter – An abundance of headlines pertaining to COVID-19, tensions in Ukraine, the persistence of inflationary pressures, or debates about the number of Fed rate hikes can easily divert attention away from the main driver of equity prices over the long-term – corporate earnings. As of the end of Friday, January 28th, roughly one-third of S&P 500 companies issued earnings reports for the 4th quarter of 2021. Based on data compiled by FactSet, Inc., about 77% of companies have beaten consensus estimates. One thing to note is that the amount of “earnings surprise”, or the degree by which consensus estimate figures are exceeded, has fallen from the levels seen over prior quarters. Profit margins are still quite high relative to historical levels but have modestly declined due to rising input costs and pressure on wages. The less robust earnings backdrop fits our stable, but slowing growth narrative, especially over the second half of 2022.
- Robust 4Q GDP Growth Driven by Inventory Replenishment – According to the US Bureau of Economic Analysis, Real GDP growth was 6.9% in 4Q 2021. This figure handily surpassed consensus estimates. However, a large portion of growth was a function of elevated inventory investment (“restocking”), which resulted in output growing faster than final sales. Personal consumption expenditures contributed a little over 2% to growth. This figure is well below the levels seen in the first half of 2021 as the massive fiscal stimulus was working its way through the economy. Spending on services was dealt a blow after the Omicron variant rapidly circulated. COVID-19 cases in the US have been falling precipitously, following a similar trajectory compared to South Africa, where Omicron first surfaced. Barring the emergence of any additional variants, we think the transition from goods to services spending will accelerate and help alleviate some of the inflationary pressures that have been building.
|Russell 1000 Value||3.9||(0.8)||22.2||14.28||10.83||1.85|
|Russell 1000 Growth||7.2||(7.3)||14.9||27.08||22.57||0.68|
|MSCI EM (Emerging Markets)||0.2||(1.5)||(10.1)||7.70||8.63||2.38*|
|Fixed Income||Week||YTD||1-Year||3-Year||5-Year||Div Yield|
|Bloomberg Barclays US Aggregate||0.4||(2.1)||(2.8)||3.78||3.11||2.11|
|Bloomberg Barclays US High Yield – Corporate||(0.2)||(2.1)||2.5||6.44||5.50||5.06|
|Bloomberg Barclays Municipal Bond||(0.5)||(2.3)||(1.5)||3.65||3.54||1.67|
|Bloomberg Barclays Global Aggregate x US (Country)||(0.4)||(1.4)||(6.2)||1.81||2.55||1.24|
|Crude Oil WTI (NYM $/bbl) Continuous||1.0||17.4||61.2||16.9||10.5||88.3|
|Natural Gas (NYM $/mmbtu) Continuous||36.3||54.7||93.4||26.2||11.5||5.5|
|Gold NYMEX Near Term ($/ozt)||(1.1)||(1.0)||(1.2)||11.2||8.3||1,809.2|
|Copper Cash Official LME ($/mt)||(0.9)||1.9||27.4||17.5||10.9||9,880.0|
|Currencies||1 Week Ago||YTD||1-Year Ago||3-Years Ago||5-Years Ago||Current Level|
|U.S. Dollar per Euro||1.13||1.14||1.20||1.15||1.08||1.13|
|Japanese Yen per U.S. Dollar||114.33||115.16||105.10||109.38||112.43||114.40|
|U.S. Dollar per British Pounds||1.35||1.35||1.36||1.31||1.25||1.36|
Chart of the Week
FANG Stocks Not Moving in Unison
- The chart shows how some of the largest constituents within the S&P 500 have performed since the summer of 2020. For several years companies such as Facebook (now Meta), Microsoft, Apple, Google, Amazon, and Netflix outperformed the market by a wide margin. More recently, there has been a greater return disparity amongst these stocks. This is further amplified by the recent selloff of Facebook following lower revenue guidance, which is not captured in the chart above.
- This is a welcome sign for active managers that don’t have a significant concentration in highly valued growth stocks that have been the clear winners since the 2008/2009 Financial Crisis. “FANG” dominance has been a major headwind for investors trying to keep pace with the market, especially for those who are valuation conscious and cautious when it comes to maintaining prudent levels of individual equity exposure.
- It’s too early to say the market leadership has shifted definitively, but there has been a temporary pause of the indiscriminate buying of yesterday’s top performers.
Commentary: Negative Sentiment Persists
Previously we opined about the elevated level of investor bearishness regarding the near-term prospects of the equity market. Less sanguine views are also being captured by the consumer sentiment survey data compiled by the University of Michigan. As you can see from the chart below, readings below 70 often occur during periods just before, or in midst of a recession. Based on this one data point, consumers are clearly not content about the current or future state of the economy. This is atypical during periods of robust economic growth, like 2021, when Real GDP accelerated to levels not seen since 1984. The pandemic, inflationary pressures, and multiple geopolitical events have justifiably weighed on the psyche of many individuals. That said, we think sentiment will gradually improve as COVID-19 starts to become a more distant memory and some semblance of normalcy returns.