Market Down and Dirty
Last Week’s Economic/Market Summary
Data
- U.S. equity indices showed strength last week with their best returns since February.
- S&P 500 +3.82% Dow +4.02%, Russell 2000 +2.42%, Nasdaq +3.61%
- The All-Country World Index gained 3.22%.
- S&P 500 sub-sectors were all positive last week.
- Technology led to the upside by a wide margin with gain of almost 6%.
- Utilities was the worst performer with a gain of 2.6%.
- The CBOE Volatility Index (VIX) collapsed almost 40% to close back below the critical 20 level.
- S&P 500 +3.82% Dow +4.02%, Russell 2000 +2.42%, Nasdaq +3.61%
- US Treasury bond yields were higher last week as the aggregate bond market declined in value.
- US 2yr +0.07% at 0.65%, 10yr +0.14% to 1.48%, 30yr +0.19% to 1.87%.
- As expected, with strength in equities, the bond market saw significant outflows.
- Commodities as an aggregate asset class were mixed last week.
- WTI Crude shot higher by 8.6%.
- Gold was flat at -0.03%.
- The US Dollar index was little changed at -0.07%.
- In our opinion, U.S. economic data was mixed last week.
- The job openings report came in higher than expected while jobless claims were lower.
- November’s CPI inflation gauge came in at +6.8% which is the highest yearly gain since 1982.
- Consumer sentiment came in higher than expected.
- An index of equities outside the US (FTSE All-World ex-US) gained 2.48%.
Conclusion
- Equity markets saw significant strength last week after 2 consecutive weeks of declines.
- Despite the new covid variant & the biggest yearly inflation rise since 1982, the S&P 500 powered higher to end at a fresh all-time high last week.
- Concerns over the omicron covid variant seemed to subside as institutional investors plowed money into equities.
- Hedge Funds, who slashed their equity exposure at the fastest pace since April 2020 during the prior 2 weeks, seemed to be back as the major source of demand for equities.
- This was even though data suggests this variant is 4.2x more transmissible than the delta strain was in its early stages.
- We remain cautious and will continue to watch worldwide gov’ts responses to this latest Covid variant.
- S&P 500 subsectors were all positive last week as Tech led by a wide margin with a gain of almost 6%.
- Energy, Consumer Staples, Materials, Industrials, & Healthcare were up over 3%.
- Utilities, Real Estate, Consumer Discretionary, & Financials were up over 2%.
- The lack of breadth in the participation of up moves of major equity indices remains a concern.
- 5 stocks accounted for 51% of the S&P 500’s return since the end of April.
- MSFT, GOOGL, AAPL, NVDA, TSLA
- Historically, drawdowns have been larger following narrowing breadth.
- However, despite this narrowing breadth, major drawdown risk appears it could be low in the coming months due to light positioning, strong earnings growth, & share prices already reflecting likely Fed tightening.
- 5 stocks accounted for 51% of the S&P 500’s return since the end of April.
- Non-US equities also moved higher last week as the US Dollar paused its run of strength.
- While Asian equities have mostly underperformed during the pandemic, good news could be on the horizon.
- Economists predict China will start adding fiscal stimulus in early 2022.
- This was after the country’s top officials said their key goals for the coming year include counteracting growth pressures to “ensure stability”.
- Chinese economic conditions and policy could be turning positive & supportive as a result.
- Yields climbed across the curve last week in the US Treasury market.
- Despite the rise in Treasury yields, the real interest rate declined as inflation measures came in at their highest levels in almost 40 years.
- The Federal Reserve will meet this week and expectations are for increased tapering of bond buying.
- They may also signal a quicker than expected increase to interest rates.
- Based on current positioning, the market sees the Fed having little ammo to hike before having to pause as a result of economic weakness.
- Additionally, the “breakevens” gauge of the bond market is suggesting that the Fed will be challenged to get inflation down toward its 2% target.
- As we’ve discussed at length, this is a tricky situation for the Fed and they remain a key input to our risk management process.
Ryan A. Mumy, CFP®,
AIF® – Chief Investment Officer
Contact: 828/855-9400
info@CIASonline.com or rmumy@bloomberg.net
1 Source: Bloomberg – 2/25/2022
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