Every day, self-proclaimed stock market “experts” tell us why the market just went up or down, as if they really knew. So where were they yesterday? – Anonymous
The major stock averages all closed lower last week after the Federal Reserve released minutes from its December meeting that showed that Fed officials were ready to tighten monetary policy sooner and more aggressively than expected. While the market started the new year strong as investors looked to put money to work, stocks began to slide after the Fed minutes were released. The S&P 500 Index dropped 1.9% while the technology-heavy Nasdaq Composite Index plunged 4.5% as growth-oriented stocks in the technology sector appear overvalued when interest rates are headed higher. With consumer prices at their highest level in 40 years and the jobs market nearing full employment, Fed officials were in agreement that they should begin to reduce the bond holdings on their balance sheet after the Fed raises the federal funds rate, which looks like sometime in March. Wall Street reacted negatively to the news as stocks fell and government bond yields rose. The yield on the 2-year Treasury ended the week at 0.87% while the yield on the 10-year Treasury finished at 1.76%. The minutes showed that the Fed believed that the very easy monetary policies implemented in the early days of the pandemic were no longer needed or justified given the strength of the economy. Fed officials were all wary of the risk of higher inflation, perhaps even more of a risk than the spread of the Omicron variant and its negative effects on the economy. The Fed reiterated that it foresees three quarter-percentage-point rate hikes in 2022 along with another three increases in the following year. The December employment report was not encouraging, either, as nonfarm payrolls rose by only 199,000, far less than the 375,000 that were expected. However, the unemployment rate did drop to 3.9%, the lowest level reached during the pandemic and near a 50-year low set back in February 2020 before the pandemic started. Wages also rose more than expected and job numbers in October and November were revised higher.
Other jobs data last week was mixed as ADP reported that private payrolls totaled 807,000 in December, more than double the estimate of 375,000, while weekly jobless claims were 207,000, higher than the forecasted total of 195,000. Both the ISM manufacturing and services sector indices in December were lower than expected but each index has grown for 19 consecutive months, an indication of continued strength for each one.
For the week, the Dow Jones Industrial Average declined 0.3% to close at 36,231 while the S&P 500 Index dropped 1.9% to close at 4,677. The Nasdaq Composite Index plunged 4.5% to close at 14,935.
The consumer price index (CPI) for December is expected to jump more than in November while the core CPI that excludes food and energy prices is expected to rise more than 5% year-over-year. The producer price index (PPI) for December is also forecast to increase but by less than in November. Retail sales for December are expected to increase modestly and match the data in November. The University of Michigan consumer sentiment index for January should be about the same as it was last month but much lower than its peak in April due mostly to higher inflation.
The Federal Reserve releases its Beige Book, which is a report that summarizes current economic conditions across all 12 Federal Reserve districts.
The most prominent companies that are scheduled to report quarterly earnings as fourth quarter earnings season begins this week are JP Morgan Chase, Wells Fargo, Citigroup, Blackrock, KB Home and Delta Air Lines.
Inflation data will be in the spotlight this week as both the producer price index (PPI) and the consumer price index (CPI) are expected to show that prices continue to rise at hotter than anticipated levels. Even after a disappointing employment report last week in terms of the number of jobs added to the economy, bond yields rose as wage growth was higher than expected, contributing to inflation fears. Although some economists believe that inflation is approaching a peak, the inflation data this week is likely to paint a different picture. Federal Reserve Chairman Jerome Powell is also scheduled to speak at his nomination hearing before a Senate committee and is likely to reiterate and expound upon what appeared in the Fed minutes last week. That news rattled the bond market and sent the yield on the 10-year Treasury from 1.52% to start the year to as high as 1.80% on Friday. While technology stocks in the Nasdaq Composite Index with high price earnings ratios bore the brunt of the selling last week, bank stocks actually performed well and moved higher on the prospect that rising interest rates would help earnings. Fourth quarter earnings season begins in earnest on Friday with the big money center banks and their results are expected to be strong. In fact, corporate earnings as a whole are forecast to be excellent for the year, although overall profit growth will be considerably less than it was in 2021. If bond yields can settle down and stop going up, technology stocks and other growth-oriented stocks should rebound based on their strong earnings, although the ride could be a bumpy one.