Key Takeaways
- The S&P 500 closed at 4,397.94 down from 4,662.85 last Friday . The VIX settled at $28.85, its highest level in a while.
- The Nasdaq entered correction territory having its worse week since 2020. It seemed to be bouncing on Thursday and promptly reversed at the end of the trading day. Netflix’s slowing growth dragged on it again Friday.
- Financials had a mixed earnings and have lost almost 5.5% as a sector in 5 days. Energy continued its relative outperformance. Staples, Utilities and Real Estate rallied Friday.
- The selling has been pretty broad-based this week, but certain areas of the market have been hard hit. All eyes are on the Fed meeting next week.
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Markets had a very rough week. The Nasdaq entered correction territory and despite attempting a bounceback on Thursday, Netflix’s disappointing guidance and slowing growth continued the drag on markets. It declined 5.9% since Monday. This was the worst week for the index since 2020. On Tuesday, the US 10-YR hit a 2-year high of 1.87% but has since retreated about 10 bps. However, given the pace of selling, markets are certainly being driven by panic and fear more than fundamentals. Elevated volatility from recently more stable levels have been seen this week. Breadth has been declining and less than half of the S&P 500 components are above their 50 dma. Certain elements of the market have been very hard hit; small-caps, high-PE technology companies, and bio-technology were amongst them. Cryptocurrencies also sold off widely. The holdings of the ARK innovation fund have been badly mauled. Those high PE stocks trade at high PEs because the market has high expectations for their growth. Given the changing currents, it’s a lot harder for the market to determine what that growth will be. It is hard in normal times, let alone in a world that has had demand patterns fundamentally altered by a pandemic.
Given the nature of where the selling is concentrated, the market seems to be very concerned about the prospects for growth. While the advent of the newest Fed tightening cycle certainly introduces a lot of uncertainty, the upside is that there does appear to be a lot of strength in certain sections of the economy. COVID-19 metrics appear to be rolling over from Omicron-associated outbreaks and the strength of the US consumer is unprecedented in recent history. Are markets having a hard time pricing risk and what an aggressive Fed trying to clamp down on inflation means? They certainly are, but it is not accurate to call the economy weak.
The attrition of the ‘streaming wars’ has clearly taken its toll on the original leader of the pack, Netfllix. The company had a miss on subscriber growth and some surprisingly pessimistic guidance. Friday wiped off about $50 billion from the market-cap of the original leader of streaming. Peloton, another pandemic beneficiary, has had to undergo a major restructuring, hired consulting firm McKinsey and even suspended production due to waning demand. The shares actually rallied today given the company seems to have gotten a better handle on what time it is and how to respond to a world that may be in the beginning stages of moving on from the anomalous COVID driven environment.
The company’s expectations for subscriber growth in the first quarter came in at 2.5 million net new subscribers. This was less than half of the 5.8 million that analysts expected. Part of the weak guidance is because of the content schedule, which is getting ever-more grueling as more competitors enter the space. While the company just produced blockbuster content for the holiday season, the next batch of high-quality stuff won’t be ready until later in 2022.
Peloton and Netflix both had atrocious sell-offs because growth expectations formed when COVID demand tailwinds were in their favor, and analysts and management both had a tough time of ascertaining when and at what pace those tailwinds would end. Netflix lost more market-cap today than the entire value of an also mauled (from the dog days of the pandemic) Zoom. However, part of the message the market is sending may also be that the COVID-19 norms might be shifting. Many thought leaders have suspected that Omicron may be a crucial step from COVID being a pandemic that dominates everyday reality to being more like Influenza, a serious concern, but not an indominatable master of daily life.
While you may be fretting about owning so much Technology, remember that despite all the gnashing of teeth this week that Microsoft started it out by announcing the largest Technology deal of all time if it is successfully completed in its $68 billion all-cash bid to buy Activision, which is on our Granny Shots list. We also highlighted MSFT in the Signal From Noise column two weeks ago. So, while there’s panic in the air and a lot of selling and re-pricing, all of our research heads still agree that this is a mid-bull market correction and will ultimately be a buying opportunity. Demographics drive destiny.
During times like these, when market fundamentals start to matter less than fear and position squaring, we believe technical analysis can be particularly helpful. Our Head of Technical Strategy, Mark Newton, has been providing some excellent tactical analysis that has been very prescient and actionable. If you missed Mark Newton’s 2022 Outlook that he gave yesterday, be sure to check out a replay here. Please do remember also that we look at equity research through multiple lenses, which may not always be wholly congruent, because we believe it provides more insight than any single method. Our Technical Strategy departments thinks we are fairly close to achieving a tradable low, perhaps within 2-3 days, but whether this is just a bounce before another leg lower and a final flush-out is difficult to tell at this point. We advised that the first half of 2022 would be treacherous across all our research departments. Remember Benjamin Graham’s great quote from the Intelligent Investor, Warren Buffett’s investing mentor: “The intelligent investor is a realist who sells to optimists and buys from pessimists.” We know it’s been a tough week, but it is also likely time to start thinking of a shopping list. Pricing power and resilient margins are looking nice after a week of uncertainty and decidedly risk-off sentiment!
