The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions – Seth Klarman
It was another big week for quarterly earnings and, for the most part, the news continued to be favorable as about half of S&P 500 companies have reported so far with about 80% of them topping expectations. But you would never know it by the performance of the major stock averages as they plunged again last week with the technology-heavy Nasdaq Composite Index losing nearly 4% and the S&P 500 Index dropping over 3%. The Dow Jones Industrial Average fared a little better as it declined about 2.5% and is now down over 9% for the year. The volatility began on Tuesday in anticipation of earnings results from Microsoft and Alphabet (Google) after hours as the market sold off fearing the worst. While Microsoft reported strong earnings and was optimistic about future revenue guidance, Alphabet missed analyst estimates on both revenue and earnings, triggering a sell-off in the stock that spread to other technology names. The stock market then rallied on Thursday following surprisingly strong earnings from Meta Platforms (Facebook), but gave those gains back and then some on Friday after Amazon reported a surprise loss and issued weak guidance for the second quarter. Technology bellwethers Apple and Intel also contributed to the sell-off even though both companies beat earnings estimates. Apple was cautious about its outlook, which disappointed investors, while Intel issued weak guidance for the quarter. The bad news seemed to be confined to technology companies as other blue chip companies such as Coca Cola, 3M, McDonald’s and Merck all reported stronger than expected earnings. The mostly positive quarterly earnings reports weren’t enough to overcome the numerous headwinds that are also facing the market. These include the Federal Reserve’s monetary policy tightening, rising interest rates, persistent high inflation, increased Covid cases and lockdowns in China and the ongoing Russian war in Ukraine. The result of these headwinds could be much slower growth in both China and the U.S., the extent of which is unknown, causing a lot of uncertainty and volatility in the markets.
U.S. gross domestic product (GDP) actually fell 1.4% in the first quarter, below expectations of a 1% gain, and much weaker than the fourth quarter of 2021. The March core personal consumption expenditures (PCE) index, the Fed’s preferred measure of inflation, rose 5.2% from a year ago and was slightly below the reading in February. Durable goods orders in March rose modestly and were slightly below estimates, but core orders that exclude transportation and are a better measure of final demand were strong. New home sales in March fell more than expected as rising mortgage rates and home prices reduced affordability. Consumer confidence in April edged slightly lower but still remains high despite surging inflation. Weekly jobless claims fell 5,000 to 180,000, in line with forecasts.
China’s capital city of Beijing reported a spike in Covid cases and most of Shanghai, China’s largest city, remains under lockdown with the worst Covid outbreak since early 2020.
For the week, the Dow Jones Industrial Average fell 2.5% to close at 32,977 while the S&P 500 Index dropped 3.3% to close at 4,131. The Nasdaq Composite Index plunged 3.9% to close at 12,334.
The April employment report is expected to show that 375,000 jobs were created and that the unemployment rate remains unchanged at 3.6%. The labor market remains tight as the number of job openings exceeds the number of people looking for work. The ISM manufacturing and services sector indices for April are both expected to remain comfortably above 50, the threshold for growth.
The Federal Open Market Committee (FOMC) meets to review its monetary policy and is expected to raise the federal funds interest rate by half a percentage point to between 0.75% and 1.00%.
The most notable companies that are scheduled to report quarterly earnings this week include Starbucks, Kellogg, Anheuser-Busch InBev, Clorox, Yum Brands, Devon Energy, BP, ConocoPhillips, Royal Dutch Shell, Advanced Micro Devices, eBay, Uber Technologies, Airbnb, Marriott, AIG, MetLife, Cigna, DuPont, Cummins, Illinois Tool Works, Pfizer, CVS Health, Moderna, McKesson, Cardinal Health and Biogen.
Investors will have a lot to digest this week as the Federal Reserve announces its monetary policy decision, key data on the labor market will be released and a plethora of companies are scheduled to release their quarterly earnings. Last week’s sell-off in stocks was precipitated by several bellwether technology companies either reporting disappointing earnings or issuing weaker than expected guidance going forward. While there are no such high profile technology companies on the agenda this week, it still promises to be a busy week with a diverse group of companies due to report. In addition, the Federal Open Market Committee (FOMC) is widely expected to raise the federal funds interest rate by 50 basis points (a basis point is one hundredth of one percent) in what is expected to be the beginning of a series of rate hikes that could take the fed funds rate to 2.50% or higher by year-end. In fact, the Fed could decide to hike rates by larger increments in the next several meetings in order to gain the upper hand in its fight to reduce high inflation. With the current labor market strong, now may be an opportune time to implement such a plan. Investors will get updates on the current strength of the jobs market this week in the form of the ADP National Employment Report on Wednesday, weekly jobless claims on Thursday and the government employment report on Friday. The GDP report for the first quarter was weaker than expected and actually showed a decline so these job reports could be key in determining if there is additional weakness in the economy.