Broker Check


THIS WEEK'S UPDATE

| January 10, 2022
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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

monetary normalization.


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).


FINAL THOUGHTS

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!

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