/perspectives/weekly-viewpoint/the-rough-patch-continues

The Rough Patch Continues

The major market indices finished the holiday shortened week lower with the S&P 500 declining for a third straight week.

January 24, 2022    |    By Michael Schwager

Performance for Week Ending 1.21.2022:

The Dow Jones Industrial Average (Dow) finished off 4.58%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 6.12%, the Standard & Poor's 500 Index (S&P 500) dipped 5.68% and the Nasdaq Composite Index (NASDAQ) slumped 7.55%. Sector breadth was negative with all 11 of the S&P sector groups posting losses. The consumer discretionary sector (-8.49%) was the biggest loser followed by communication services (-7.05%) and Technology (-6.94%).

Index* Closing Price 1/21/2022 Percentage Change for Week Ending 1/21/2022 Year-to-Date Percentage Change Through 1/21/2022
Dow 34265.37 -4.58% -5.70%
Wilshire 5000 44219.82 -6.12% -8.75%
S&P 500 4397.94 -5.68% -7.73%
NASDAQ 13768.92 -7.55% -11.99%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 1/17/22 – 1/21/22

The major market indices finished the holiday shortened week lower with the S&P 500 declining for a third straight week. The Nasdaq Composite posted its worst week since March 2020 and has now fallen into correction territory (defined by a 10 percent plus pullback from a recent high). Markets appear to be caught up in a period of price discovery as investors try to gauge what has been priced into the markets and what is likely to come to fruition in the months/quarters ahead. Investors are weighing elevated levels of inflation, the hawkish pivot by the Federal Reserve and rising levels of Covid cases against a slowing but still strong economy, a solid start to fourth quarter earnings season, and a retreat in valuation levels resulting from the recent pullback in stock prices.

Contrarians Take Note: According to the American Association of Individual Investors (AAII), bullish sentiment has plunged to the lowest level since July 2020. In its latest weekly poll, the percent of investors who consider themselves bullish on the markets outlook plunged to 21.0% from 37.7% at the end of 2021 while bearish sentiment jumped to 46.7% from 30.5% at year end. In its simplest form, investing is all about emotions–fear and greed–and these emotions also tend to be contrarian in nature, meaning investors tend to be the Greediest (Bullish) at or near market tops and most Fearful (Bearish) at or near market bottoms. While the plunge in bullish sentiment alone will not likely be enough to prevent the market from going lower, it should be viewed as a sign that the latest pullback may be near to running its course.

Omicron Soft Patch: Data reports reflecting conditions in the first part of January are suggesting that rocketing Omicron cases have become a near-term headwind to growth. Last week the Labor Department reported that initial jobless claims in the week ended January 15 rose 55K to 286K, the third straight weekly increase and the highest level since mid-October. Meanwhile, the NY Fed's Empire Manufacturing Index for January contracted for the first time in 18 months as measures of orders and shipments retreated sharply, suggesting the omicron variant of the coronavirus caused a pullback in activity. With signs that Omicron cases have started to peak in several areas of the country, the Covid related headwinds are likely to fade in the months ahead, although we will need to get through the January data releases before calling an all clear.

Q4 EPS Season – Okay, So Far: While it's still early, fourth quarter earnings season is off to a decent start. Through Friday, 64 members of the S&P 500 have released results with 78% surprising to the upside. Aggregate earnings growth is up 21.3%, modestly ahead of the 21% pace that analysts are forecasting for the overall quarter.

According to Bloomberg's World Interest Rate Probability tool, investors are fully pricing in the first 25 basis point (bps) rate hike at the May FOMC meeting followed by a second at the July meeting and a third at the December meeting. The coming week's CPI report, which is expected to show headline inflation running at a 7.0 percent year-over-year pace, coupled with drop in the unemployment rate could force the Fed's hand to lift rates sooner than May, with a grow odds of a March lift off – stay tuned.

Bullish Narrative Intact: As we look forward, our positive view on the equity market remains intact. While volatility is likely to remain elevated and the pace of gains are likely to slow in the year ahead, we feel the macro environment will remain supportive and should continue to provide a sturdy backbone for additional upside. The US economy remains in good health and growth in the quarters ahead is expected to remain above trend. The US consumer is in good shape and savings rates remain above pre-pandemic levels, suggesting that as consumers become more comfortable with the economic recovery, pent up demand will be unleashed. Earnings expectations also suggest solid forward growth. Based on consensus expectations from Bloomberg, earnings are forecast to grow by nearly 9 percent this year followed by over 10 percent growth in both 2023 and 2024. While a near-term period of consolidation cannot be ruled out, we would view weakness as an opportunity to selectively increase equity exposure.

The Week Ahead: The focal event in the week ahead will be the two-day Federal Open Market Committee (FOMC) meeting on Tuesday and Wednesday, along with Fed Chair Powell's follow-up press conference on Wednesday afternoon. While no major policy initiatives are expected to be announced at the meeting, investors are hoping to get further clarity on the Fed's timeline for ending quantitative easing, the start of the rate hiking cycle, and when the central bank will begin to reduce the size of its balance sheet. According to Bloomberg's World Interest Rate Probability function, the market is currently discounting four rate hikes of the course of this year with the first coming at the March FOMC meeting. It will be a busy week on the data front highlighted by the initial estimate of fourth quarter GDP growth. Other reports of interest include the January manufacturing PMI from Markit, the Conference Board's reading on January consumer confidence, and durable goods orders during December. The earnings calendar will move to the front burner this week with over 100 members of the S&P 500 scheduled to release results, including 14 components of the Dow Average.

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.




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