The idea that a bell rings to signal when investors should get into and out of the market is simply not credible. After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently. – John Bogle

The stock market’s losing streak continued last week with the three major averages all plunging as investors remained fearful of the prospect of tighter monetary policy. There also were several notable earnings disappointments, namely from Netflix and Goldman Sachs, that contributed to the negative sentiment and caused stocks to suffer their worst week since 2020. Although Netflix beat both earnings and revenue estimates, it lowered its first quarter subscriber growth considerably while Goldman Sachs missed earnings estimates due to a surge in payroll expenses, the same problem that JP Morgan disclosed the previous week in its earnings release. The biggest losses last week were in the technology-laden Nasdaq Composite Index, which has now tumbled over 15% from its all-time high set back in November and is off to its worst start to a year since 2008.  The S&P 500 Index and the Dow Jones Industrial Average fared a little better but it was still a painful week as the S&P 500 closed nearly 6% below its all-time high set recently on January 4th. Also weighing on the markets last week was the rise in the 10-year Treasury yield to 1.9%, although by week’s end the yield had settled at 1.75% as investors sought a safe haven in government securities. (Bond yields and prices move in opposite directions). The increase in bond yields since the start of the year has been the result of hotter than expected inflation which has been running at 7% year-over-year as well as a change in Federal Reserve policy to increase the federal funds interest rate. Despite these fears, there was some good news last week. Although the fourth quarter earnings season has only just begun, over 70% of S&P 500 companies that have reported have topped expectations, including blue chip companies such as Bank of America, Morgan Stanley, Procter & Gamble and UnitedHealth Group. But fear is driving the markets right now and not fundamentals such as economic data and quarterly earnings reports. Whereas before investors were trained to buy the dip when stock prices fell, now investors are selling the rally if stock prices rise.

Last Week

U.S. leading economic indicators rose nearly 1% in December following a similar increase in November, suggesting the economy will continue to expand late into the spring. Headwinds include the Omicron variant, labor shortages, inflationary pressures and potential Fed rate hikes, but growth for the entire year should be about 3.5%. Existing home sales in December fell for the first time in four months, but even with the drop, annual home sales in 2021 increased 8.5% from 2020. Weekly jobless claims totaled 286,000, compared to estimates of 225,000 and much higher than the previous week’s total of 231,000.

For the week, the Dow Jones Industrial Average fell 4.6% to close at 34,265 while the S&P 500 Index lost 5.7% to close at 4,397. The Nasdaq Composite Index plunged 7.6% to close at 13,768.

This Week

The preliminary estimate of fourth quarter gross domestic product (GDP) is expected to show growth of 5.6%, compared to 2.3% in the third quarter. Durable goods orders in December are forecast to be flat after a nearly 3% increase in November while December new homes sales are expected to be higher than in the previous month. January consumer confidence is forecast to be less than in December due to concerns about rising inflation and the Omicron variant.

The Federal Open Market Committee (FOMC) meets to review its monetary policy and is expected to leave the federal funds rate unchanged near zero. Most economists expect the Fed to raise the rate by a quarter-point in March with an additional three quarter-point rate hikes by the end of the year.

The most prominent companies that are scheduled to report quarterly earnings this week are Microsoft, Apple, IBM, Texas Instruments, Intel, Tesla, 3M, General Electric, Nucor, Lockheed Martin, Boeing, Caterpillar, General Dynamics, American Express, Johnson & Johnson, Abbott Labs, Verizon, AT&T, Comcast, International Paper, Dow Chemical, Mastercard, Visa, McDonald’s, Archer-Daniels-Midland, Southwest Airlines and Chevron.

Portfolio Strategy

Investors will have a lot to digest this week as the Federal Reserve meets on Tuesday and Wednesday to review its monetary policy, a slew of fourth quarter earnings reports are due to be reported and some key economic data will be released. The most important news event will definitely be the Fed meeting and although the federal funds rate is expected to remain unchanged, investors will look for clues from the Fed’s statement and Federal Reserve Chairman Jerome Powell about their future plans. The consensus view is that the bond buying program will end in March at which time the Fed will raise the federal funds rate by a quarter-percentage point. This initial rate hike will then be followed by an additional three rate increases, bringing the fed funds rate to 1.0% by the end of the year. The Fed may also comment on its plan to reduce the size of its bloated balance sheet by allowing maturing securities to roll off without replacing them. This tightening of monetary policy is in response to hotter than expected inflation and investors will get a read on this when the personal consumption expenditure (PCE) index is released this week. This has been the Fed’s preferred measure of inflation and could influence the direction of bond yields, which have been rising recently on inflation fears.  This will also be a busy week in the fourth quarter earnings season as nearly half of the blue chip companies in the Dow Jones Industrial Average are scheduled to report as well as the two biggest stocks in terms of market capitalization, Microsoft and Apple. So far any companies whose earnings or revenue have fallen short of expectations have seen their stock prices decline while those that have beaten estimates have seen only a modest increase in their stock price. With investor fear having the upper hand right now, the markets are likely to remain volatile and turbulent in the week ahead as fundamentals have taken a back seat.