THE WEEK ON WALL STREET
A jump in yields sparked by a more aggressive sounding Federal Reserve sent the
market lower to start the new year. The Dow Jones Industrial Average fell 0.29%,
while the Standard & Poor’s 500 declined 1.87%. The Nasdaq Composite index was
hardest hit, dropping 4.53% for the week. The MSCI EAFE index, which tracks
developed overseas stock markets, slipped 0.55%.
THE TECH WRECK
The perception of a more hawkish Fed put a hard stop to the year’s positive start
and pushed bond yields higher and stocks into a broad retreat. Technology and
other high-valuation shares were particularly hard hit by rising yields. Even the
larger-capitalization technology companies with strong cash flows and profits were
damaged. As yields trend higher, investors are questioning if these companies can
lead the market in 2022. Fueling this decline was a four-day sell-off of technology
companies by hedge funds that, in dollar terms, represented the highest level in
more than ten years. Stocks continued to struggle into the final trading day,
unsettled by a renewed climb in yields and an ambiguous employment report.
THE FED’S SURPRISE
Minutes of December’s Federal Open Market Committee (FOMC) meeting were
released last week and it revealed a more hawkish Fed than investors had been
expecting. One surprise was that the first hike in interest rates could occur as early
as March. Another, and perhaps more consequential, surprise was the idea of
beginning a “balance sheet run-off” by the Fed following the first hike in the federal
funds rate. A balance sheet run-off means that maturing bonds won’t be replaced
with new bonds, the result of which is a smaller Fed balance sheet. Many investors
view this step as removing liquidity from the system, a departure from market
expectations that the balance sheet would remain flat during the Fed’s pivot to
THE WEEK AHEAD: KEY ECONOMIC DATA
Wednesday: Consumer Price Index (CPI).
Thursday: Jobless Claims. Producer Price Index (PPI).
Friday: Retail Sales. Industrial Production. University of Michigan Consumer Sentiment Survey.
THE WEEK AHEAD: NOTABLE COMPANIES REPORTING EARNINGS
Wednesday: Infosys Limited (INFY)
Thursday: Delta Airlines, Inc. (DAL), Taiwan Semiconductor Manufacturing
Company, Ltd. (TSM)
Friday: JPMorgan Chase & Co. (JPM), Citigroup, Inc. (C), Wells Fargo & Co. (WFC),
BlackRock, Inc. (BLK).
The market is trading on news headlines what might happen with interest
rates. News headlines aren’t that meaningful, but even though the impending
interest rate increases have been telegraphed for the last year the market has gotten
a little nervous now that the time has come. At the end of the day, corporate
earnings and guidance will determine where the market ends up this year.
We will enter earnings season soon and I suspect underperformers will blame
inflation and supply chain issues for their woes. The market may be repricing some
of those companies whose earnings are levered to interest rates and may push even
the best companies around in the short term. However, when the dust settles at
year end, I suspect the U.S. economy will still be getting better and the market
should reflect that. Our quarterly update will be out soon and address how we think
things could play out in the year ahead.
Have a good week!