Market Priced to Perfection, Earnings Weren’t, and the Russian Wild Card (Market Recap January 21)
January 21 Market Recap – The market was “priced to perfection,” earnings weren’t, and the Russian wild card all conspired to pummel the markets.
Dow 34,265 or (1647) or (4.58%)
Nasdaq 13,768 or (1125) or (7.55%)
S&P 4,397 (280) or (5.98%)
USD10Y 1.761% (0.9) bp or (0.50%)
Q4 Earnings Season Moves into Full Swing
The week got off to a poor start when Goldman Sachs missed their numbers and was bookended when Netflix posted decent numbers but slowing subscriber growth. As nothing less than perfect will do in this environment, investors sold not just those two stocks but equities in general as the fear trade was on. However, there were positive signs; Bank of America (BAC) reported a decent number as did Morgan Stanley (MS), the airlines are recovering albeit warning that omicron could be a problem for them in the first quarter, and Proctor and Gamble (PG) beat and raised forecasts which demonstrates that they have been able to pass increasing costs onto the consumer so far. None of the above was enough to appease the market however, which has switched from “buy the dip” to “sell the rally” mode. At some point institutional investors will decide that the market is cheap (the Nasdaq is down 14% from its high) and will begin buying. The question is when?
The Russian Wild Card
There hasn’t been a lot of press on this topic, but Russia has quietly moved 100,000 troops across from the Ukraine along three fronts. While physical intervention by the West is unlikely, the type of invasion if and when it happens, and the West’s reaction to it will drive the impact of the invasion on the markets.
Infections, hospitalizations and deaths are slowing down thankfully but are still at extremely elevated levels. The government’s website offering free tests went live a day early, on Tuesday, and while there were complaints of glitches, every family can order four free, at-home Covid tests. Not all is rosy though; the airlines warned that their Q1 numbers may be affected due to lack of crews to work due to omicron and the Empire State Manufacturing number was an unmitigated disaster, showing contraction in New York area manufacturing almost all of which was ascribed to omicron infections among workers.
Earnings season continues in earnest with Microsoft, Tesla, and Apple headlining the reports. The Fed meets and Chair Jerome Powell will brief the press on Wednesday. Initial Jobless Claims bear watching on Thursday as claims have jumped considerably the last two weeks. Is this an omicron blip or a sign of something more serious in the economy? On Friday, slew of economic data will be released and market observers will pay special attention to the Core Personal Consumption Expenditure (PCE) number.
Market Data Points Next Week
- Monday – January Markit Manufacturing and Services PMI. Earnings: IBM
- Tuesday – January Consumer Confidence. Earnings: General Electric (GE), Johnson and Johnson (JNJ), American Express (AXP), Microsoft (MSFT).
- Wednesday – Fed Chair Jerome Powell speaks. Earnings: Boeing (BA), Tesla (TSLA), Intel (INTC).
- Thursday – Initial Jobless Claims, Q4 GDP, Durable Goods. Earnings: McDonald’s (MCD), Apple (APPL).
- Friday – Disposable income, Personal Spending, Core PCE. Earnings: Chevron (CVX), Caterpillar (CAT).
January 21 Market Recap Trading…
Monday – Markets Closed in Observance of MLK Jr. Day.
Tuesday – Dow (543) to 35,368, Nasdaq (386) to 14,506, S&P (85) to 4,577, USD10Y +9.1 bp to 1.879%
- The 10-year U.S. Treasury yield continued its dizzying ascent, up 5% today to 1.879%, its highest level since January of 2020.
- Combined with the Goldman Sachs earnings miss and a horrible Empire State manufacturing number, stocks were pummeled. The technology heavy Nasdaq received the worst of it and the index is now down more than 10% from its high.
- Ten of the of the eleven S&P sectors traded down today led lower by Tech, Financials, and Communication Services. Energy was the only positive performer, up 41 bp.
- Earnings: Goldman Sachs (GS) fell almost 7% after missing earnings; their employee compensation surged 23% during the quarter. Charles Schwab (SCHW) missed both the top and bottom line and fell 3.5%.
- Empire State Manufacturing was a disaster at -0.7 vs expectations of 25.5. It is the lowest number since January of 2020 and signals a contraction in manufacturing widely ascribed to the effects of Omicron.
Wednesday – Dow (339) to 35,028, Nasdaq (166) to 14,340, S&P (44) to 4,532, USD10Y (3.3) bp to 1.846%.
- Everything fell today, apart from crude oil, including the 10-year UST yield.
- Nine of the eleven S&P sectors traded down today led lower by Consumer Discretionary, Financials and Tech. Only the defensive sectors of Healthcare and Utilities traded higher.
- Earnings: Bank of America (BAC) reported a mixed quarter and finished slightly higher on the day. Morgan Stanley (MS) beat expectations and traded up 1.83%. Proctor and Gamble (PG) beat and raised its forecast, trading up 3.3%. United Airlines (UAL) beat expectations but guided Q1 expectations lower due to Omicron. The stock traded down 2.65%.
Thursday – Dow (313) to 34,715, Nasdaq (186) to 14,154, S&P (50) to 4,482, USD10Y (2.7) bp to 1.819%.
- All three indices were trading higher until Peloton (PTON) announced it was halting production in February and March due to lower demand. The stock promptly sold off 24% and took the indices with it.
- Jobless claims missed expectations again at 286,000 vs 220,000 expected and last week’s slightly revised higher print of 231,000 claims.
- Philly Fed produced a good number of 23.2 vs 18.5 expected and last month’s 15.2 print.
- Earnings: American Air (AAL) reported a smaller than expected loss and the stock fell 3.18%. Netflix (NFLX) beat subscriber growth numbers, blew out earnings, reported inline revenues and yet the stock was hammered for 19% in after hours as subscriber growth was down year over year.
Friday – Dow (450) to 34,264, Nasdaq (385) to 13,768, S&P (85) to 4,397, USD10Y (5.8) bp to 1.761%.
- Netflix’s (NFLX) earnings report last night was poorly received by the markets to say the least. The streaming company traded down 21% and dragged the rest of the indices down with it.
- Leading Economic Indicators reported 0.8%, in line with expectations.
- Ten of the eleven S&P sectors traded down today led lower Communication Services, Consumer Discretionary, and Materials. The only positive sector was Consumer Staples.
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Disclaimer: This is not a recommendation to buy or sell any of the securities listed above. I personally, or a family member whose account I control, have positions in the following securities/assets…Bitcoin, Cardano, Chainlink, Ethereum, ETHE, GBTC, and TSLA.