- Will 'buying the dip' continue to be successful after the most accommodative Fed in history begins tightening?
- Major central banks, ECB, BOE, RBA all have interest rate decisions in the coming week
- Key US Nonfarm Payrolls release prints on Friday
- The two indices that have gained the most in the past year—the Russell 2000 and the NASDAQ—represent both sides of the Reflation Trade, which means each has the most to give back now.
- The Dow represents value shares that were severely discounted by investors during lockdowns, similar to the Russell 2000. But the DJIA provides access to mega cap company shares, which don't have the same limitations during social restrictions as the smaller domestic firms listed on the Russell 2000 Index.
Though most stocks rebounded on Friday to finish the trading week, and the S&P 500 and Dow Jones each arrested losses on a weekly basis for the first time in three weeks, daily activity was often wild and in some cases filled with reversals.
We expect additional, significant volatility in the coming week as bulls and bears continue to duke it out over market direction, after the sharp equity market selloff that's taken hold thus far in January.
Some investors might view the deceleration as a buying opportunity. Others, however, may be spooked, fearing an extended meltdown.
Will Buying On Pullbacks Continue To Pay Off Once Hiking Starts?
During the course of the past week, the SPX lost as much as 4%, but finished up 2.43% for the day on Friday, closing +0.77% for the week. After tumbling as much as 9.8% from its Jan. 3 record close, even at one point scraping at the 10% boundary signifying correction territory, the broad benchmark closed out the week 7.01% below its record high.
The mega cap Dow Index gained 1.65% on the final day of last week's trade, to advance 1.34% on a weekly basis. The move followed a 3.14% midweek dive. The 30-component blue chip index outperformed peer US indices on both a daily and weekly basis. For its part, the Dow fell 7.17% from its Jan. 4 record at its lowest point, but is now 5.63% below that peak.
The NASDAQ finished Friday +3.13% higher, gaining 0.11% for the week. This may seem like a paltry move in absolute terms, but considering the tech-heavy index came back from a 4.91% plunge over the course of last week, it's actually an impressive feat. The index lost 15.51% from its highest ever closing price on Nov. 19 but as of Friday's close is now -12.71% from that level. Nevertheless, the tech benchmark underperformed on a weekly basis.
The small cap Russell 2000 finished up 1.26% on Friday, jumping +0.98% for the week, having bounced back from a 4.35% loss during the week. From its Nov. 8, 2021 record close to its closing price this past Thursday, the small cap index fell 20.94%, to at least briefly enter a bear market. Friday's rebound brought the gauge up to -19.41% from its record close.
Here are our takeaways from analyzing the relationship between the various performances of the major indices:
The question investors must now answer for themselves is whether pullbacks will continue to pay off by providing buying opportunities, as they did during the Fed's easing period—the loosest central bank monetary policy in history. Now that the market is pricing in four, possibly five rate hikes by the end of 2022, there is reason to believe the equity market might not necessarily behave as it did previously, when liquidity was plentiful.
This once seemingly endless money supply kept a lid on its value, plus the lowest interest rate on record—something we will likely never see again, hopefully—acted in tandem to propel stocks to new, frothy heights. Now, the reduced supply of money will increase borrowing costs even as interest rates increasing make the price of borrowing even more expensive.
As for valuation multiples, after the January selloff to this point, the S&P 500 is valued at 19.5 times earnings, compared to 22 times earnings in late December, near its highest levels in 20 years. The five-year multiples average is 18.5 times earnings.
Some analysts, including those at Barclays don't think the selloff has yet presented a buying opportunity. They anticipate an additional 8% decline from current levels.
After the Fed turned hawkish, Treasury yields jumped, triggering the recent selloff. Rising yields are a strong indicator of upcoming rate hikes, which make debt more expensive for companies and decreases the reasons for investors to keep supporting high-priced stocks.
Also, higher, guaranteed bond payouts—such as for the US 10-year benchmark—siphon investors away from volatile equities. Indeed, after wiping out pandemic losses, having reached the highest levels since December 2019, yields are gearing up to extend their advance.
Rates on the 10-year note are trading within a pennant after completing a sizeable symmetrical triangle since March, both of which are bullish in the underlying uptrend.
The dollar posted a new high in its uptrend since the early-January 2021 bottom, hitting its highest point since June 2020.
After a three-day plunge of 3.74% amid USD strength, gold found support above its uptrend line since the August 2021 bottom.
However, that trendline is also the bottom of a triangle, whose top, or downtrend, goes as far back as the August 2020 record peak and therefore is much stronger.
Bitcoin retreated slightly to below $38,000 before reversing back above that threshold.
The cryptocurrency fell after climbing for seven out of eight sessions in what we highly suspect is a bearish flag.
Mike Wirth, CEO of Chevron (NYSE:CVX) sees oil at $100 as a possibility. This optimism is particularly noteworthy after the oil and gas supermajor's disappointing earnings release on Friday which showed profits had slumped as the value of some of its long-held fields dropped, hurting the company's ability to fully benefit from surging energy prices.
Shares of Chevron dropped 3.5% from its new all-time high hit on Thursday.
The stock completed an extremely bearish Evening Star—a three-day candlestick reversal—which not only wiped out Wednesday's advance but half of Thursday's very long green candle as well. We consider this exceedingly bearish, since the long green candle developed as the stock was reaching for its new high as it tested its previous 2014 record.
Although oil rose slightly on Friday, the price has been struggling to push above the January 19-20 Island Reversal— a pattern in which bears have the final word.
WTI bulls have been challenged to support troughs relative to faster-rising peaks since March, demonstrating weakness.
The Week Ahead
All times listed are EST
Monday
Markets closed for Spring Festival in China, New Year's Day in South Korea, and Chinese New Year in Hong Kong
19:30: Australia – Retail Sales: forecast to nearly halve to 3.9% from 7.3%.
22:30: Australia – RBA Interest Rate Decision: predicted to remain at 0.10%.
Tuesday
Markets remain closed in China, South Korea, and Hong Kong for holidays
3:55: Germany – Manufacturing PMI: likely to have remained flat at 60.5.
3:55: Germany – Unemployment Change: expected to surge to -8K from -23K.
4:30: UK – Manufacturing PMI: seen to have remained steady at 56.9.
8:30: Canada – GDP: believed to have dropped to 0.4% in November, from 0.8% previously.
10:00: US – ISM Manufacturing PMI: to edge lower to 57.5 from 58.7.
10:00: US – JOLTs Job Openings: anticipated to rise to 11.075M from 10.562M.
Wednesday
Markets remain closed in China, South Korea, and Hong Kong for holidays
5:00: Eurozone – CPI: to have dropped to 4.3% YoY from 5%.
8:15: US – ADP Nonfarm Employment Change: seen to have dropped by almost 75% to 208K from 807K.
10:30: US – Crude Oil Inventories: previous print showed a build of 2.377M barrels.
Thursday
China and Hong Kong remain on holiday
4:30: UK – Services PMI: forecast to have edged up to 53.5 from 53.3.
7:00: UK – BoE Interest Rate Decision: rate predicted to rise to 0.50% from 0.25%.
7:45: Eurozone – ECB Interest Rate Decision: anticipated to remain steady at 0.00%.
8:30: US – Initial Jobless Claims: forecast to fall to 245K from 260K.
8:30: Eurozone – ECB Press Conference
10:00: US – ISM Non-Manufacturing PMI: expected to decline to 59.3 from 62.3.
Friday
China's markets remain closed for Spring Holiday
4:30: UK – Construction PMI: to hold steady at 54.3.
8:30: US – Nonfarm Payrolls: predicted to drop by almost a quarter to 155K from 199K.
8:30: US – Unemployment Rate: anticipated to remain at 3.9%.
8:30: Canada – Employment Change: seen to collapse to -125.0K from 54.7K.