Weekly Market Update

For the third straight week, stocks moved lower as the velocity of the recent interest rate rise continued to roil investor sentiment and the appetite to buy-the-dip dissipated, as those who have attempted to call the bottom have not been rewarded. The market weakness has not been limited to stocks either, with bonds and cryptocurrencies down for the year and bitcoin notably falling over 10% on Friday. Leading much of the weakness continues to be the growth heavy Nasdaq Composite, which is officially in correction territory after falling more than 10% from its recent highs and on pace for its worst January on record (per Bespoke). Attempts on Wednesday and Thursday from the Nasdaq to rally were unable to hold and its inability to bottom has dragged on broader stock market sentiment. The beginning of the Q4 earnings season has been solid, but unable to stem the recent weakness, and a poor earnings report on Thursday night from Netflix made Friday’s market open more precarious. As a result, the Nasdaq is now very oversold and sentiment gauges are indicating some of the most pessimism for the index since March 2020, conditions that we would cautiously note often coincide with bottoms. Also worth pointing out, is that the yield on the 10-year US Treasury, which briefly hit 1.9% on Wednesday, the highest levels since December 2019 and a major catalyst for this three-week market swoon, has significantly retreated to around 1.76% to end the week.

Investors now find themselves limping into the weekend and circling next Wednesday’s Federal Reserve meeting announcements as well as Friday’s release of the personal consumption expenditures (PCE) report, which is the Fed’s preferred inflation gauge. Some pundits are now predicting as many as five interest rate hikes in 2022 and we suspect the market will continue to trade skittishly until it gets more clarity from the Fed. The market is now pricing in an over 90% probability for a 25-basis point (0.25%) Fed rate hike in March and while we agree with that initial hike timeline, we wonder if perhaps calls for five hikes in 2021 and/or a 50-basis point hike in March are perhaps overdone. Ultimately, it is important to note that while the beginning of tightening cycles is typically hallmarked by market volatility, stocks can move higher following initial Fed rate hikes (see chart below from LPL Financial). Next week we anticipate more market volatility, particularly heading into Wednesday’s Fed meeting, but should their meeting announcements prove to be better-than-feared, the odds of a relief rally improve dramatically.

Ian G. Browning, CFA | Director, Investment Strategies & Shareholder
Peter E. Simmons, JD | President & CEO