Tough Week as Russia‐Ukraine Situation Dampens Sentiment

The S&P 500 Fell 1.6% This Week, Driven Primarily By Worsening Russia‐Ukraine Developments. Risk Sentiment Was Further Pressured By Disappointing Growth Stock Earnings Reactions And Lingering Concerns About A Fed Policy Mistake.

The Dow Jones Industrial Average fell 1.9%, the Nasdaq Composite fell 1.8%, and the Russell 2000 fell 1.0%.

Russia‐Ukraine headlines were all over the place, but at the end of the week, the possibility of a Russian invasion of Ukraine appeared "imminent," even as Russia's foreign minister accepted an invitation to meet with Secretary of State Blinken next week. That is, if Russia doesn't invade over the three‐day weekend.

Investors de‐risked and sought shelter in Treasuries, where the 10‐yr yield declined three basis points to 1.93% after touching 2.06% midweek. Ten of the 11 S&P 500 sectors ended the week in negative territory.

The energy sector was the weakest performer with a 3.7% decline as oil prices ($91.21, ‐1.88, ‐2.0%) briefly fell below $90 per barrel amid reports indicating that a nuclear agreement with Iran was within reach. The consumer staples sector (+1.1%) was the only sector that closed higher.

In the growth‐stock space, NVIDIA (NVDA), Shopify (SHOP), Roblox (RBLX), Roku (ROKU), DraftKings (DKNG), Fastly (FSLY), and Redfin (RDFN) suffered steep losses following their earnings reports.

Regarding the Fed, St. Louis Fed President Bullard (FOMC voter), New York Fed President Williams (FOMC voter), and Cleveland Fed President Mester (FOMC voter) separately prepared the market for a rate hike in March.

The fed‐funds‐sensitive 2‐yr yield, however, declined five basis points to 1.47%, suggesting the Fed's policy shift has been priced in or that the geopolitical situation could sway the Fed into being less hawkish than feared. The probability for a 50‐bps hike in March decreased to 21.1% from 49.2% last week, according to the CME FedWatch Tool.

LARGE‐CAPS FALTER AMID RATE‐HIKE FEARS AND GEOPOLITICAL ANGST

Large‐Cap Indices Struggled This Week As Risk Sentiment Was Pressured By Increased Rate‐Hike Expectations And Fears Of A Russian Invasion Of Ukraine.

The S&P 500 fell 1.8%, the Nasdaq Composite fell 2.2%, and Dow Jones Industrial Average fell 1.0%. The Russell 2000, however, rose 1.4%

Eight of the 11 S&P 500 sectors closed lower, led by the communication services (‐3.9%), information technology (‐2.9%), real estate (‐2.8%), and consumer discretionary (‐2.3%) sectors. The materials (+1.1%) and energy (+1.8%) sectors ended the week with gains decent gains.

The real action started midweek when more U.S. states announced plans to relax mask mandates amid improving COVID‐19 trends and an observation from Dr. Fauci that the U.S. is heading out of the "full blown" pandemic phase. That catalyzed a broad‐based advance, which was upended on Thursday following the Consumer Price Index (CPI) report for January.

Briefly, total CPI increased 0.6% month‐over‐month in January (Briefing.com consensus 0.5%), and so did core CPI (Briefing.com consensus 0.5%), which excludes food and energy. On a year‐over‐year basis, they were running at their highest levels since 1982 at 7.5% and 6.0%, respectively.

After the report, St. Louis Fed President Bullard (FOMC voter) told Bloomberg that he supports the Fed hike rates by 100 basis points by July 1, including one hike being 50 basis points. The market, which had brushed off the negative reaction to the CPI report, rolled over following these comments.

The CME FedWatch Tool assigned the probability of a 50‐basis‐point hike in March to 93.8% on Thursday. More noteworthy, the 2‐yr yield spiked 22 basis points to 1.56% in one day ‐‐ its largest increase since the financial crisis.

Stocks weakened further on Friday after National Security Advisor Jake Sullivan acknowledged there was a "distinct possibility" that Russia could invade Ukraine before the end of the Olympics. Oil prices rose modestly while Treasury yields fell.

Rate‐hike fears were somewhat tempered, though, after a Bloomberg report suggested that the Fed is unlikely to issue an emergency hike in between policy meetings and that a 50‐basis‐point hike is not a given.

At week's end, the 2‐yr yield was up 20 basis points at 1.52%, and the 10‐yr yield was up three basis points to 1.96%. The U.S. Dollar Index rose 0.6% to 96.03.

MARKET OVERCOMES RATE‐HIKE EXPECTATIONS

Each Of The Major Indices Rose More Than 1.0% This Week, As The Market Continued To Stabilize From An Oversold Condition Despite Increased Rate‐Hike Expectations.

The Nasdaq Composite led the advance with a 2.4% gain, followed by the S&P 500 (+1.6%), Russell 2000 (+1.7%), and Dow Jones Industrial Average (+1.1%).

Eight of the 11 S&P 500 sectors closed in positive territory, paced by the energy (+4.9%), consumer discretionary (+3.9%), and financials (+3.5%) sectors with impressive gains. The materials (‐0.2%), real estate (‐0.2%), and communication services (‐0.3%) sectors ended the week with modest losses.

The market had plenty going for it this week, including month‐end rebalancing activity, first‐of‐the‐month inflows, an improved technical posture, a fear of missing out on further rebound gains, and better than expected (and feared) earnings reports. The S&P 500 reclaimed its 200‐day moving average (4444).

Alphabet (GOOG) and Amazon.com (AMZN) saw big gains following their earnings reports but not as big as Snap's (SNAP), which provided investors a huge sigh of relief after Meta Platforms (FB) plunged over 25% following its disappointing earnings news. SNAP popped off with a 60% gain after falling 24% prior to its report.

Expectations for the Fed to raise the fed funds rate by 50 basis points in March increased noticeably after the January employment report displayed surprisingly strong jobs growth and higher‐than‐expected wage gains. According to the CME FedWatch Tool, the probability of that happening increased to 36.6% on Friday, versus 14.3% one week ago.

On a related note, both the ECB and the Bank of England acknowledged the inflation risks in the economy. The Bank of England responded accordingly with a 25‐basis‐point rate hike for the second meeting in a row, and the ECB said it couldn't rule out a rate hike this year after previously indicating that was an unlikely possibility.

For good measure, the Prices component of the January ISM Manufacturing Index increased to 76.1% from 68.2%, and WTI crude futures topped $92 per barrel ($92.30, +2.08, +2.3%) at week's end.

Treasury yields pushed higher amid the inflation pressures and hawkish Fed expectations. The 2‐yr yield rose 15 basis points to 1.32%, and the 10‐yr yield rose 15 basis points to 1.93%. The U.S. Dollar Index fell 1.9% to 95.44 amid a stronger euro.

Market Recap - BLUE-CHIPS OUTPERFORM IN VOLATILE WEEK

The Dow Jones Industrial Average Gained 1.3 This Week, As Investors Sought Blue-Chip Stocks Amid The Heightened Volatility In The Market. The S&P 500 Rose 0.8%, Thanks To A Strong Finish On Friday, While The Nasdaq Composite (Unch) Closed Flat, And The Russell 2000 Fell 1.0%.

Six of the 11 S&P 500 sectors closed lower while five sectors closed higher. The industrials (-1.5%), utilities (-1.4%), and consumer discretionary (-1.0%) sectors fell at least 1.0%, while the energy sector (+5.0%) stood out with a 5% gain as oil prices flirted with $89 per barrel during the week.

The S&P 500 bounced within a 231-point range -- hitting technical resistance at its 200-day moving average (4435) several times -- this week. The primary concern was the Fed being more aggressive in tightening policy to the point where it slows down economic growth.

The fed funds futures market began pricing in the probability for five rate hikes this year, starting in March, following the FOMC meeting on Wednesday. Fed Chair Powell explained that policy needs to adapt to high inflation risks and that extremely accommodative policy no longer seems appropriate. The Advance Q4 GDP report and the PCE Price Index both supported the Fed Chair's case.

Accordingly, 2-yr yield rose 18 basis points to 1.17%, and the U.S. Dollar Index rose 1.7% to 97.24. The 10-yr yield increased just three basis points to 1.78%.

Investors weren't ready to give up on the market, though, especially when a lot of companies continued to beat earnings expectations. The big discounts in stock prices helped, too. Investors were selective and preferred quality over riskier stocks like Tesla (TSLA), which fell 10% following its better-than-expected earnings report.

Dow components Apple (AAPL), Microsoft (MSFT), Visa (V), Johnson & Johnson (JNJ), American Express (AXP), IBM (IBM), 3M (MMM), and Dow Inc. (DOW) posted decent gains following their reports. Caterpillar (CAT), which beat EPS estimates, was hit by commentary about higher costs and lower margins.

Despite the comeback effort late in the week, the small-cap Russell 2000 still closed lower by 20% from its all-time high.

Market Recap - A GREAT WEEK – FOR THE BEARS

Simply Put, This Was An Ugly Week For The Stock Market, Marred By An Inclination To Sell Into Strength. The Dow Jones Industrial Average Fell 4.6%, The S&P 500 Fell 5.7%, The Nasdaq Composite Fell 7.6% And Entered Contraction Territory, And The Russell 2000 Fell 8.1% And Approached Bear Market Territory.

The S&P 500 consumer discretionary sector was the weakest sector with an 8.5% decline, followed by the information technology (-6.9%), and communication services (-7.1%) sectors with 7% declines. The utilities sector outperformed on a relative basis with a 0.8% decline.

The main selling drivers were arguably concerns about profit margins, a fear of being in high-multiple growth stocks that provide disappointing news, anxiety surrounding the Fed's tightening plans, and even the selling itself (which fueled more selling).

Profit-margin concerns were stoked by Goldman Sachs (GS) amid higher compensation costs, Netflix (NFLX) amid higher programming costs, and PPG Industries (PPG) amid higher raw material costs. To be fair, several companies, including Procter & Gamble (PG), displayed the pricing power to overcome higher costs.

Picking on Netflix, the stock plunged 22% on disappointing Q1 guidance, which mirrored the 24% drop in Peloton (PTON) the day before when CNBC reported that the company was pausing production of its bikes due to lower demand. Note, Peloton said the report was inaccurate.

Even though Peloton was already down huge from all-time highs, as was Netflix to a lesser extent, prior to the disappointing news, the fact that the stocks took a huge beating signaled to investors that other beleaguered growth stocks could still face similar paths this earnings season.

Interest rates were a problem early in the week, as the 2-yr yield brushed up against 1.08% and the 10-yr yield brushed up against 1.90%, but a retracement late in the week provided no moral support. That was likely because the move into Treasuries was driven by a fear of stocks going down.

On a week-over-week basis, the 2-yr yield increased three basis points to 0.99%, and the 10-yr yield decreased two basis points to 1.75%. The U.S. Dollar Index rose 0.5% to 95.63. Oil prices ($85.16/bbl, +1.29, +1.5%) edged higher amid geopolitical tensions.

The S&P 500 ended the week below its 200-day moving average (4429).

Market Recap - Buyers Lack Conviction

The Stock Market Closed Lower This Week, As Investors Faded A Half-Hearted Rebound Bid During The Week. The S&P 500 And Nasdaq Composite Both Declined 0.3%, While The Dow Jones Industrial Average (-0.9%) And Russell 2000 (-0.8%) Declined Nearly 1.0%.

Nine of the 11 S&P 500 sectors finished in the red, including consumer discretionary (-1.5%), real estate (-2.0%), and utilities (-1.4%) with noticeable declines, while the energy (+5.2%) and communication services (+0.5%) sectors closed higher. Energy stocks followed oil prices ($83.87, +4.93, +6.3%) much higher.

The 10-yr yield wasn't the problem this week since it was unchanged at 1.77%. It was more that the market remained concerned about the Fed's tightening plans, the still-elevated valuations of growth stocks, weakening technical factors, and the disappointing start to the Q4 earnings-reporting season.

Fed Chair Powell, Fed Vice Chair nominee Lael Brainard, and a host of other Fed officials made it clear this week that they support tightening policy in part to keep inflation in check. Mr. Powell said in his confirmation hearing that he thinks the Fed will end asset purchases in March, hike rates over the course of the year, and allow the balance sheet to run off later in the year.

The 2-yr yield, which tracks expectations for the fed funds, rate increased nine basis points to 0.96%. The probability for the first rate hike to be in March increased to 86.1% from 75.9% last Friday, according to the CME FedWatch Tool.

The latest inflation data bolstered these expectations, even though the headline CPI and PPI prints for December decelerated on a month-over-month basis. That was largely due to the sharp decline in oil prices, which have since recovered. The core readings, which exclude food and energy, were hotter than expected.

As for earnings, JPMorgan Chase (JPM), Citigroup (C), and BlackRock (BLK) fell sharply following their earnings reports on Friday, but Wells Fargo (WFC) pleased shareholders with its report. 

Other considerations included the S&P 500 closing below its 50-day moving average (4681), inviting the potential for follow-through selling; downside guidance from Sherwin-Williams (SHW), raising concerns about margin pressures; and the breakdown in negotiations surrounding the Build Back Better Act.

Market Recap - 2022 Begins With A Huge Jump In Rates & A Growth-Stock Beatdown

The First Week Of The New Year Saw Heavy Selling In The Growth Stocks, A Rotation Into Value Stocks, And A Sharp Rise In Long-Term Interest Rates. The Nasdaq Composite Dropped 4.5%, The Russell 2000 Dropped 2.9%, And The S&P 500 Dropped 1.9%.

The Dow Jones Industrial Average declined just 0.3% after setting intraday and closing record highs -- as did the S&P 500 -- early in the week.

The S&P 500 information technology (-4.7%), health care (-4.7%), and real estate (-4.9%) sectors fell more than 4.5%, while the energy (+10.6%) and financials (+5.4%) sectors rose more than 5.0% and 10.0%, respectively, amid higher oil prices ($78.94, +3.79, +5.0%) and a steepened yield curve.

The growth-stock weakness was linked to the rise in the 10-yr yield, which hit 1.80% on Friday after starting the week at 1.51%. The first 12-basis-point increase didn't deter risk sentiment, though, evident in the S&P 500 setting record highs to start the week and Apple (AAPL) reaching the $3.0 trillion market capitalization.

The persistent advance to 1.80%, however, was unsettling and opened the door for 2.00%. The increased likelihood for a higher interest-rate environment this year contributed to the rotation into value stocks, even after a broad-based decline following the December FOMC Minutes on Wednesday.

The FOMC Minutes showed that participants thought it would be appropriate to reduce the size of the Fed's balance sheet at a faster pace than during the previous normalization period, as well as starting closer to the first rate hike than last time. Part of the reasoning was the economic outlook is stronger and the balance sheet is simply a lot bigger now.

Expectations for a more assertive Fed were supported by the Employment Situation report for December, which depicted a tight labor market with strong wage gains and near-max employment. Nonfarm payrolls increased by 199,000 (Briefing.com consensus 440,000), the unemployment rate declined to 3.9% (Briefing.com consensus 4.1%), and average hourly earnings rose 0.6% (Briefing.com consensus 0.4%).

The CME FedWatch Tool increased the probability for the first rate hike in March to 75.7%, versus 54.0% one week ago. The 2-yr yield, which tracks expectations for the fed funds rate, rose 14 basis points to 0.87%. The 10-yr yield ended the week at 1.77%, or 26 basis points above last Friday's settlement.

Interestingly, the rotation into value/cyclical stocks happened despite the deceleration in the ISM Manufacturing and Services PMIs for December and daily COVID-19 cases topping 1 million early in the week.

On a technical note, S&P 500 closed just above its 50-day moving average (4675) at week's end.

SEASONALITY KEEPS MARKET AFLOAT TO END 2021

The Major Indices Ended The Last Week Of 2021 On A Mostly Positive Note, Particularly For The S&P 500 (+0.9%) And Dow Jones Industrial Average (+1.1%). Both Gained Around 1.0% And Set Intraday And Closing Record Highs This Week. The Nasdaq Composite Declined 0.1% While The Russell 2000 Increased 0.2%.

There weren't any specific catalysts driving the action, suggesting seasonal factors and year-end rebalancing activity played influential roles. This week encompassed part of the Santa Claus rally period, which is defined as the last five sessions of the year and the first two sessions of the new year.

Ten of the 11 S&P 500 sectors finished in positive territory for the week. No sector rose more than the 3.7% gain in the real estate sector, but the materials (+2.6%), consumer staples (+2.5%), and utilities (+2.6%) sectors did compete. The communication services sector (-0.8%) closed lower after a tough session on Friday.

There was plenty of COVID-19 news in the mix.

The bad news was that businesses continued to see Omicron-related disruptions, as called out by Micron (MU) and seen in flight/cruise line cancelations. The CDC even upped its travel notice on cruise lines to Level 4, advising people to "avoid cruise travel, regardless of vaccination status."

The CDC, however, shortened the recommended isolation time for asymptomatic people with COVID-19 to five days from 10 days. The FDA, meanwhile, is expected to expand eligibility for Pfizer's (PFE) booster shot to 12- to 15-year-olds on Monday. Johnson & Johnson (JNJ) said data demonstrated its booster shot was 85% effective against hospitalization in South Africa when the Omicron variant was dominant.

The Treasury market was quiet this week. The 10-yr yield increased two basis points to 1.51% (+59 bps in 2021) while the 2-yr yield increased four basis points to 0.73% (+61 bps in 2021).

Market Recap - Santa Claus Makes Early Appearance on Wall Street

The S&P 500 Rose 2.3% On Christmas Week, As Buy-The-Dip Efforts Prevailed In Convincing Fashion. The Nasdaq Composite (+3.2%) And Russell 2000 (+3.1%) Both Advanced More Than 3.0% While The Dow Jones Industrial Average Increased 1.7%.

The market ended a three-day skid with a three-day rally, which saw the S&P 500 circle around its 50-day moving average (4628). All 11 sectors closed higher, led by the consumer discretionary (+3.8%) and information technology (+3.3%) sectors with gains over 3.0%. The utilities sector increased just 0.2%.

There wasn't one specific thing that catalyzed the rally, but there was a belief that market had gotten oversold on a short-term basis and was due for a rebound. Moreover, investors have shown a strong willingness to buy the dip whenever the benchmark index breaches its 50-day moving average.

Other supportive factors included waning concerns about the Omicron variant amid encouraging research and vaccine data, hope that Senator Manchin (D-WV) can get on board with the Build Back Better Act after initially rejecting it, better-than-expected earnings results from Nike (NKE) and Micron (MU), and positive momentum.

At the same time, the market brushed aside concerns about the Fed potentially making a policy mistake next year. It's worth reminding that even if the Fed hikes rates three times, the rate environment will still be relatively accommodative.

The Treasury market softened up amid the bullish price action in equities and some encouraging economic data. The 2-yr yield rose five basis points to 0.69%, and the 10-yr yield rose nine basis points to 1.49% -- steepening the curve.

As an aside, the market rebounded right before the seasonally-favorable Santa Claus rally period, which is defined as the last five trading sessions of the year and first two sessions of the new year. Of course, there's no guarantee the next seven sessions will end with gains.

Market Recap - Market Struggles as Fed Does the Expected

After The S&P 500 Ended Last Week At A Closing Record High, The Benchmark Index Fell 1.9% This Week, As Investors Took Profits And Digested The FOMC Policy Decision. The Russell 2000 (-1.7%) And Dow Jones Industrial Average (-1.7%) Both Declined 1.7% While The Nasdaq Composite (-3.0%) Underperformed With A 3.0% Decline.

As expected, the Fed left the target range for the fed funds rate unchanged at 0.00-0.25%, said it will double the reduction of asset purchases to $30 billion per month ($20 billion for Treasuries and $10 billion for agency MBS), and signaled three rate hikes in 2022 amid expectations for continued inflation pressures.

On a related note, the Producer Price Index for November came in hotter than expected, with the index for final demand up 0.8% month-over-month (Briefing.com consensus 0.5%) and up 9.6% year-over-year.

Interestingly, the only day the S&P 500 closed higher was Fed decision day, and that was largely due to short-covering activity on the view that Fed Chair Powell didn't sound as hawkish as feared. The market fumbled that rally over the next two days, leaving the sectors mixed by week's end.

The information technology (-5.1%), consumer discretionary (-4.3%), and energy (-5.0%) sectors were the weakest performers with losses over 4.0%. The defensive-oriented health care (+2.5%), real estate (+1.6%), consumer staples (+1.2%), and utilities (+1.2%) sectors rose more than 1.0%.

With Apple (AAPL) nearly hitting a $3.0 trillion market capitalization, investors presumably felt it was appropriate to take profits, especially when also taking into consideration downside guidance from Adobe (ADBE) and the continuing spread of the coronavirus.

The 10-yr yield fell nine basis points to 1.40% amid increased demand while the 2-yr yield decreased two basis points 0.64% despite the Fed signaling three rate hikes next year.

Elsewhere, the Bank of England increased its bank rate by 15 basis points to 0.25% in a surprise move. The European Central Bank and Bank of Japan left rates unchanged, as expected, and announced a further tapering of asset purchases.