Nasdaq surges after dovish remarks by Fed Chair Powell, S&P 500 up 1.6%

It’s not always easy to do what’s not popular, but that’s where you make your money. Buy stocks that look bad to less careful investors and hang on until their real value is recognized. – John Neff

Dovish remarks by Federal Reserve Chairman Jerome Powell last week and a strong earnings report from Meta Platforms (Facebook) ignited a rally in technology stocks with the Nasdaq Composite Index surging 3.3% and the S&P 500 Index gaining 1.6%. The Nasdaq has now risen nearly 20% since setting a low back on December 28^th while the S&P 500 is trading at its highest level in five months. After a volatile start to the week that resulted in virtually no gains, the stock market came to life on Wednesday when the Federal Open Market Committee (FOMC) raised the federal funds rate by 25 basis points (a basis point is one hundredth of one percent) as expected to a range of between 4.5% and 4.75%. In its statement, the Fed noted that inflation had eased but that it remains elevated, requiring “ongoing increases in the target range” to return inflation to its 2% target over time. But Powell also noted that for the first time, the disinflationary process had started and that inflation should recede without significant economic decline. His comments suggested that the Fed might pause its aggressive rate hiking campaign and even begin to lower rates near the end of the year. The market immediately took this to mean that the economy was in for a soft landing and stocks traded higher. After the market closed on Wednesday, Meta Platforms reported that its fourth quarter revenue easily topped expectations and the company announced a $40 billion stock buyback and an optimistic earnings outlook. These positive results improved market sentiment and fueled a rally in technology stocks as the Nasdaq soared over 3% on Thursday. Unfortunately, the gains were short-lived after technology heavyweights Apple, Alphabet (Google) and Amazon all released disappointing earnings results after the market closed on Thursday. Apple and Alphabet missed estimates on both the top and bottom lines while Amazon reported mixed results and issued a weak forecast.  The week ended with the release of the January employment report, which showed that 517,000 new jobs were created, far higher than the 190,000 that was forecast, and that the unemployment rate fell to 3.4%, the lowest jobless level since May 1969. While the strong employment data was good news for the economy, it raised concerns that it could be bad news for inflation.

Last Week

In other labor market data, ADP reported that private payrolls increased by 106,000 in January, lower than the 190,000 that was expected and 235,000 in December. Weekly jobless claims fell 3,000 to 183,000 compared to estimates of 195,000.  The Job Openings and Labor Turnover Survey (JOLTs) showed that there were just over 11 million job openings in December, higher than estimates and more than in November, with about 1.9 openings for every available worker. The ISM manufacturing index in January was 47, less than in December, and indicative of contraction while the ISM services sector index was 55, much higher than in December and a sign of expansion.

The European Central Bank (ECB) raised its benchmark interest rate by 50 basis points and plans another hike in March. The International Monetary Fund (IMF) raised its global growth projections for 2023 to 2.9% but warned that higher interest rates and the ongoing Russia-Ukraine war could be headwinds.

For the week, the Dow Jones Industrial Average fell 0.2% to close at 33,926 while the S&P 500 Index rose 1.6% to close at 4,136. The Nasdaq Composite Index surged 3.3% to close at 12,006.

This Week

The only significant piece of economic data this week is the preliminary University of Michigan consumer sentiment index for February, which is expected to be relatively low at 65, in line with the reading in January.

It will be another busy week for quarterly earnings reports and the most notable companies scheduled to report include Walt Disney, Tyson Foods, PepsiCo, Kellogg, Newell Brands, Philip Morris International, Yum Brands, Chipotle Mexican Grill, Cummins, DuPont, Emerson Electric, Honda Motor, Simon Property Group, BP, Dominion Energy, Duke Energy, CME Group, Prudential, CVS Health, Abbvie and Motorola Solutions.

Portfolio Strategy

After a dismal year in 2022, the stock market has rebounded this year as the S&P 500 Index posted its best January since 2019 with a return of 6.3% while the Nasdaq Composite Index has risen 15% for the year after posting its fifth straight weekly gain. It’s been the longest winning streak for the technology-laden Nasdaq since it peaked back in November 2021 and comes after arguably disappointing quarterly earnings from its biggest companies in terms of market value. Last week Meta Platforms reported its third straight quarter of declining revenue, Amazon had its weakest annual growth in its history, Apple missed earnings estimates for the first time in six years and Google’s advertising business shrank. Yet all of these companies saw their stock prices end the week higher than where they started the week. The reason that their stock prices reacted positively despite the seemingly bad news is that these companies have taken steps to be more cost-conscious and efficient as they have either announced large layoffs recently or scaled back on their hiring plans. These companies had become bloated during the pandemic and have now begun to cut costs to streamline their operations. Falling inflation and signs that the Federal Reserve may be nearing the end of its interest rate hikes could give these companies’ stock prices another boost. There also is an old Wall Street saying, “so goes January, so goes the year”, which has been accurate nearly 90% of the time when January has been positive for the month with an average gain of almost 16% for the full year. Investors can only hope that this adage holds true this year.