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Weekly Market Commentary | Week ending February 4, 2022

 

Commentary provided by Mark Szycher, Vice President, Investment Specialist, AIG Retirement Services

Market Performance Snapshot* (Week ending February 4, 2022, January 2022, and Year to Date)

  • Dow Jones Industrial Average®:   +1.0% | -3.3% | -3.4%
  • S&P 500® Index: +1.5 | -5.3% | -5.6%
  • NASDAQ Composite®  Index: +2.4 | -9.0% | -9.9%
  • Russell 2000® Index: +1.7 | -9.7% | -10.8%
  • 10-year U.S. Treasury note yield:  1.91%
    • Up 13 basis points from 1.78% on January 28, 2022
    • Up 40 basis points from 1.51% on December 31, 2021
  • Best-performing S&P 500 sector this week: Energy, +4.9%
  • Weakest-performing S&P 500 sector this week: Communications Services, -0.3%

     *Past performance is no guarantee of future results.

Equities gain as volatility declines

All major indices managed weekly gains as generally strong earnings eased investor concern, though earnings from Facebook’s parent company and Amazon pulled tech stocks in different directions. A stronger-than-expected January jobs report pushed Treasury yields higher. 

  • Stocks rallied on Monday, the final trading day of January, but still ended the month in negative territory. According to FactSet, the S&P 500 and NASDAQ Composite both suffered their sharpest monthly declines since March 2020.
  • Energy was the only S&P 500 sector in the green for January, up nearly 19%. Financials, which climbed in the first half of the month on higher interest rate expectations, gave back gains amid mixed reports on bank earnings, finishing January down 0.1%. With inflation remaining elevated and input costs rising, consumer discretionary stocks were the weakest performers, down 9.7%. Technology stocks were down 6.9%, as higher yields and doubts about rosy growth projections prompted investors to re-assess valuations.
  • The equities picture abroad was similar, with the European Stoxx 600 Index down 3.9% in January, the Japanese Nikkei Index down 6.2%, and the Shanghai Composite Index down 7.6%. Hong Kong’s Hang Seng Index bucked the trend, rising 1.7%, perhaps due in part to lower currency risks of the Hong Kong dollar’s peg to the U.S. dollar and easing of investors’ concerns regarding China’s recent muscular approach to regulation of tech firms listed on the Hong Kong Stock Exchange.
  • The 10-year Treasury yield climbed above 1.9% and the 2-year yield above 1.3% after January’s strong jobs report reinforced convictions that the Fed will raise rates at its March meeting.

Jobs data provides mixed picture of Omicron’s effect on U.S. economy

U.S. employers added 467,000 jobs in January, according to the Department of Labor’s (DOL’s) monthly payroll report, well above expectations of a weak gain or even a decline in jobs as Omicron raged. The report did find Omicron effects. Six million people reported working fewer hours in January due to the pandemic, compared with 3.1 million in December, and 1.8 million people said the pandemic prevented them from looking for work, up from 1.1 million in December. 

  • In its annual revision to seasonal adjustment factors, DOL said job gains for November and December were 709,000 higher than previously reported. Other months saw job levels adjusted downward. Overall, DOL found 217,000 more jobs in 2021 than initially reported.
  • The employment participation rate ticked up to 62.2% in January from 61.9% in December and November. Average hourly earnings rose 5.7% over the past 12 months.
  • DOL’s payroll report stood in stark contrast to payroll processor ADP’s report of 301,000 job losses in December. Of note, DOL reported 151,000 job gains in leisure and hospitality, while ADP registered 154,000 jobs lost in that sector. While the two reports often diverge, the contrast underscores the challenge of calculating employment figures during the pandemic.
  • After rising in early January, weekly initial unemployment claims fell for the second week in a row, a possible indication that Omicron’s employment impact is waning.
  • The Federal Reserve will receive one more monthly jobs report before deciding on interest rates and other policies at its March 15-16 meeting.
  • Eurozone inflation unexpectedly reached a new high in January, registering 5.1% vs. an expected 4.3%. High energy prices fueled the surge, while manufactured-goods inflation declined to 2.3% from 2.9% in December. The European Central Bank maintained its negative benchmark interest rate and said it will continue buying bonds through October. The Bank of England, on the other hand, raised its key rate by 0.25% (it now stands at 0.5%), announced plans to start reducing its balance sheet, and signaled further tightening to come.
  • The group of major oil producers known as OPEC+ agreed to increase production by 400,000 barrels per day in March, consistent with the plan set in motion last year. With oil prices and demand rising, and tension simmering over Russia and Ukraine, the U.S. and others have pressured OPEC+ to ramp up supply more quickly, but the group (which includes Russia) stayed the course, citing demand uncertainty. Further complicating matters, some OPEC+ members are already falling short of current targets because of production constraints.

Corporate earnings generally impress, but price and cost pressures are evident

Higher oil prices helped drive large revenue and cash flow gains at ExxonMobil and Chevron. Exxon still fell short of revenue expectations, but topped earnings estimates. Shares reached a 52-week high. Chevron exceeded revenue expectations but missed on earnings. The company’s shares pulled back after reaching a record high leading into the report.

  • Google parent Alphabet easily surpassed revenue and earnings estimates, reporting a 33% jump in ad revenue from a year earlier. The company also announced a 20-for-1 stock split for later this year. Shares jumped more than 8% after the news.
  • Meta Platforms, the company formerly known as Facebook, saw shares drop more than 25% after reporting below-expectations quarterly profit and user growth and issuing disappointing guidance for the current quarter. The downbeat report pressured technology stocks on Thursday.
  • Amazon exceeded earnings expectations, even amid “higher costs driven by labor supply shortages and inflationary pressures.” Revenue growth in the Amazon Web Services cloud unit was strong. Guidance for the current quarter was below expectations. Still, the stock rose after the report and helped lift other tech stocks heading into the weekend.
  • UPS delivered record quarterly earnings as rising demand and higher rates overcame rising labor and fuel costs. The company topped analyst estimates for the quarter, issued favorable 2022 guidance, and raised its dividend 49%. Shares rose to an all-time high.
  • General Motors beat quarterly earnings expectations despite falling short on revenue amid supply-chain challenges. The company reported record adjusted earnings for 2021 and forecast earnings “at or near record levels” in 2022 citing “an improving outlook for semiconductors in the U.S. and China.” GM said it will ramp up investments to speed electric vehicles to market.
  • Ford also plans to increase EV investments in 2022. It reported results that missed quarterly estimates for both revenue and profit as chip challenges resulted in production declines in 2021. Like GM, Ford expects chip supply to improve this year.

Final thoughts for investors

After a nerve-racking January, volatility in equity markets eased somewhat to start February, but it didn’t disappear. Higher prices, potential Fed policy missteps, the virus, and geopolitical stability remain significant risks. Speak with a financial professional about planning for the uncertain road ahead.

 

VC 30955 (02/2022)  J806401 EE

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