The major stock market averages closed the first trading week of the year lower, with technology shares the hardest hit. The Standard & Poor’s 500 Index dropped 1.9%, the Dow Jones Industrial Average held up the best, dipping only .3% as investors rotated into some value names (particularly financials and energy), while the NASDAQ Composite fared the worst, posting its worst week since last February, sinking 4.5%, due in part to the impact of rising rates.
The yield on the 10-year Treasury, which influences mortgages as well as other loans, hit 1.8%, up notably from its year end level of 1.51% (yields and prices move in opposite direction). With rising rates, stocks trading at higher valuations and with profit growth farther off in the future declined the most, as investors pay for hopeful future earnings and higher interest rates increase the cost of money. The further away a future earnings stream is anticipated, the less it becomes worth in comparison to the interest on a Treasury. The financial sector on the other hand, moved higher on the hope that rising rates would help their earnings.
The big economic number from last week was the December Jobs Report. The U.S. Department of Labor reported the economy added 199,000 jobs last month, well below market expectations for a read of 374,000 plus. While the headline number was disappointing, the report contained some signs of an improving economy, and also higher inflation. The unemployment rate fell to 3.9%, versus market expectations of 4.1%, and average hourly earnings increased by .6 percent (above expectations). Overall, we don’t expect this jobs report will change the path or pace of Federal Reserve monetary policy.
The Fed is winding down their accommodative policies, and financial markets are now expecting 3 rate increases this year, as the central bank turns to fighting inflation. Minutes released last week from the Federal Reserve’s December meeting, showed the Fed is ready to remove its stimulative policies faster than many had previously expected, including reducing their balance sheet. We’ll get more input on this during the week ahead, as key inflation reports (on consumer prices and producer prices) are due out, and Fed Chair Powell is testifying before a Senate panel. Additionally, ready or not, we are heading into another earnings season.
The financial sector kicks off another earnings reporting season during the week ahead. Major banks including Citigroup, Wells Fargo, and JPMorgan Chase are scheduled to announce results ahead of the opening bell on Friday morning. For the quarter as a whole (fourth quarter of 2021), the estimated earnings growth rate for the Standard & Poor’s 500 Index is 21.7%, if that is the actual growth rate for the quarter, it will mark the fourth straight quarter of earnings growth above 20% – according to FactSet.
So in addition to recent themes of inflation and Fed policy which will carry on into this week, we can also add earnings to the list of possible market movers! As always, don’t hesitate to reach out to us with any questions or if you would like to set up a meeting.