Key Takeaways
- The S&P 500 closed at 4,500.52 up from 4,431.85 last Friday. The VIX settled at $23.22 and despite fluctuations, the term structure appears to be normalizing.
- Thursday saw the largest drop in market-cap value when Meta missed expectations and gave weak guidance. Friday saw the largest-ever market-cap value gain for AMZN 3.74% .
- Jobs numbers came in far above expectations at 467,000. The months of November and December also had upward revisions of about 700,000 jobs in total.
- Expectations for a more hawkish Fed from the “so good it’s bad” jobs print moved up in Fed Futures markets. The possibility for a 50 bps hike also increased.
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This was a notable week in many ways. There were some amazing earnings from Tech Titans and the jobs report confirmed there’s still a lot of underlying strength in the economy. However, the print reduces the Fed’s maneuvering room since it’s getting hard to say we’re not at, or very close to, full employment. Markets suggested, in the wake of the report, that the chances for more rate hikes and the possibility of a potential .50 bps hike in March increased. Nomura officially predicted this outcome.
However, though the doves may be subdued as inflation is at 40-year highs, there is still reason to believe if inflation data moderated the Fed would pare back its aggressiveness. Raphael Bostic, who is more hawkish than you might think, has said as much. Despite volatility in equity markets the reaction in debt markets have been relatively tame. Only about 6.5 billion worth of corporate debt traded at distressed levels of 10% or more. During the height of COVID panic, those levels approached nearly $1 trillion. Yet, as our Head of Research, Tom Lee will discuss below, there are sentiment indicators suggesting the level of panic is at or even eclipsing the levels of panic and negative sentiment reached at the height of the crisis. So, when macro headlines seem to be driving a market in the grips of fear and anxiety we find it very worthwhile to pay attention to divergences like these.
For example, even though the report was decidedly hawkish it also showed that rising wages are having the effect of increasing labor force participation. The participation rate climbed past 62% for the first time since the pandemic started. Encouragingly, our team has also seen COVID-19 rolling over in the states it was first prevalent in like New York.
The declines are significant. It appears from the economic data that the economic bite of Omicron was far less than the initial bark. Starbucks, for example, took an expense hit on EPS from inflation and labor expenses but had strong guidance that the worst was over. That is not to say it didn’t affect many companies and result in some major expenses from paid sick leave, but it didn’t cripple economic activity to the degree seen by earlier waves. So, despite the uber-bearish discourse and many commentators touting the end of the bull market, there is still good news afoot suggesting that stocks can do very well.
There is good momentum in the economy from a perspective of growth and employment across many metrics. Inflation is problematic, but there is some data suggesting that inflation may moderate. Let’s talk about the Purchaser Manager Index (PMI). This measures the expansion or contraction of US manufacturing activity and was a significant leading indicator that suggested inflationary forces could be brutal. It is now only 57.6 compared to the early-2021 high of 63.7. Growth in new orders has declined to pre-pandemic levels. Some of this data could definitely be construed to suggest that inflationary pressure may be subsiding in the coming months, right as the economy is showing remarkable strength and the virus is tempering.
This is not to suggest volatility or tumult is in the rear-view mirror. We do not think it is. This week saw the greatest one-day decline in market-cap ever when Meta (FB) missed expectations and delivered disappointing guidance. The company’s COO Sheryl Sandberg explained that Apple’s initiative to empower consumers to turn off their “Identifier For Advertisers” that helps advertisers understand and track the behavior of their prospects hurt results. Apple has turned it off by default. This action, according to Meta management, will cost the company $10 billion in 2022, or about 8% of its projected revenue. The actions by Apple not only reduce the accuracy of Meta’s ad targeting but also slow the process of collecting data to show the efficacy of their ads.
On the heels of Meta’s devastating report on Thursday, Amazon was down in the high-single digits as investors feared the worst for the company. Prior to its earnings release after the bell, the commentary was swirling that it wouldn’t be able to shoulder inflation costs. However, the enormous company came in with one of the all-time blockbuster earnings reports that caused the largest market-cap value single-day gain ever. The moat held. It always helps when you’re a giant Tech company and you make good investments with your considerable cash. The company’s profits were significantly helped along by a massive nearly $12 billion gain from its equity stake in the EV company Rivian (RIVN).
The high-margin AWS segment grew at 40% YoY and the headwinds expected from wage and supply inflation were much less than anticipated. Despite the concerns about the headwinds faced by Meta in advertising, Amazon’s fast-growing, but relatively small, advertising arm has a bumper quarter as well. This huge beat helped the beleaguered Nasdaq close up 1.58% on Friday. The company also mentioned that it sees the sun coming out in the coming quarters in the most positive guidance it has given since the start of COVID. This is a volatile and scary market. The market action was horrible. Fear of rising rates is pervasive as well. We’d remind you though that real rates will likely be negative for the foreseeable future and this is decidedly beneficial for equities. It makes capital move from bonds to equities like ants to honey. Bitcoin is back above $40k and is an increasingly important bellwether. We remain cognizant of the risks but data-driven. What happens historically when sentiment is this low and markets sell-off as fast as they did? Below, Tom Lee will walk you through what the historical data is implying about returns in the months ahead.
