Omicron, supply-chain woes, and a Federal Reserve that isn’t playing ball anymore… It’s been a perfect storm for a stock-market pullback, but few commentators expected the high flyers in the NASDAQ to correct so early in the new year.
“As goes the week, so goes the year” is the common market wisdom during any year’s first seven days. And actually, Wall Street’s old “first five days” indicator has a solid track record in terms of predicting whether large-cap stocks will close the year in the green or in the red.
What is the first two weeks are rocky, though? Not only did that happen in early 2022, but the past month and a half have been unusually turbulent, as November through January are supposed to be seasonally strong for stocks.
Of course, the trajectory of the markets can change on a dime at any given moment. Earnings season is about to kick off, with big financials like Goldman Sachs and Bank of America reporting soon, along with Procter & Gamble, Netflix, and many transportation companies on tap.
It’s likely to yield a mixed bag of results. Cyclical sectors, such as energy, materials, industrials, and discretionary products, stand to benefit during this rising inflation environment. Meanwhile, rate-hike-sensitive segments like big banks and technology might disappoint investors with their fourth-quarter fiscal data.
We’re already off to a disappointing start, as JPMorgan Chase’s stock fell more than 6% after the company recently reported its earnings, while Citigroup’s stock declined 1.3% after the bank showed a 26% decline in profits. Also, BlackRock posted a top-line revenue miss and the company’s shares slid 2.2%.
With more high-stakes earnings reports in view, Wall Street is undoubtedly hoping that a “first 10 days” rule isn’t in effect. Both the S&P 500 and the Dow Jones Industrial Average lost value during 2022’s first two weeks, while the tech-heavy NASDAQ declined for its third consecutive week.
Is this all about Omicron, which kick-started the NASDAQ’s correction in November? There is evidence that Omicron is spreading quickly and may be impacting more sensitive business segments.
Yet, Omicron isn’t the primary driver of bearish market sentiment. For one thing, a 7% annualized U.S. inflation rate isn’t going to spur borrowing, spending, and entrepreneurship – in other words, it’s just bad for business overall.
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At the same time, there’s increasing pressure on the Federal Reserve to raise interest rates multiple times this year. The markets tend to be forward-looking, so their fear of the Fed’s punch bowl being taken away is being priced into equities now.
Tech stocks and financials have benefited from the government’s largesse and accommodation for 12 years running, but the party could be ending soon and the hangover could be particularly painful.
We’re already witnessing evidence of the “great rotation” out of high flyers and into defensive stocks, as the NASDAQ Composite just had its worst start to a year of the past 30 years, with 2009 being the only exception.
Looking ahead, investors may want to focus on another laggard: small-cap stocks. Whereas large-cap technology stocks have just recently started to underperform, small-caps have trailed their bigger counterparts for quite a while.
There’s an opportunity here, as the small-cap-focused Russell 2000 always catches up to the other major stock-market indexes sooner or later. This doesn’t mean that every small business will thrive in 2022, but there are bound to be some big winners in there.
In the commodities market, gold and silver have been stuck in a range for a long time, even while uranium, lumber, natural gas, and others soared. It’s reasonable to predict that precious metals will play catch-up at some point, even if it’s difficult to time the move before it happens.
The takeaway here is that overlooked stocks, when they represent high-growth businesses, are likely to reward their shareholders over the next 11 or 12 months. Meanwhile, the stocks that have already priced in the next several years’ worth of growth, will have a tough time justifying themselves to a skittish, squeamish Wall Street.
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