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2020 Financial Markets Update

Week in Review: January 21, 2022

Recap & Commentary

Markets suffered their worst week since March 2020, as concerns about higher interest rates and inflation dragged stocks lower. Not even a relatively good start to earnings season was able to assuage investor concerns. Both the S&P 500 and NASDAQ fell below their 200-day moving averages, a level which technical analysts view as being supportive of a security’s price. This invariably led to talk of a “death cross,” when a security’s 50-day moving average closes below its 200-day moving average. Such an occurrence is thought to portend a deeper selloff. While attention grabbing, few investors put much credence in technical analysis.

Interest rates were volatile during the week, with the 10-Year Treasury yield rising as high as 1.89%, its highest level since Jan. 2020, before ending the week effectively unchanged. Paradoxically, higher yields led investors to sell stocks and seek the relative safety of bonds, thereby driving bond yields back down.

Through Friday, 13% of S&P 500 companies had reported 4Q21 earnings.  Thus far, 80% have beaten their earnings estimate. According to industry group FactSet, 4Q21 earnings are currently projected to grow 22% from 4Q20. With so much focus on inflation, investors will be closely scrutinizing company reports and questioning management teams to determine the extent to which companies can continue to defray the cost of higher input prices and wages. Investors will also be awaiting the conclusion of the Federal Reserve’s meeting this upcoming week to see if the central bank announces any new policy changes.

Economic Commentary

Housing data for December was mixed as existing home sales fell short of expectations, while housing starts exceeded expectations. Existing home sales declined in December for the first time in four months. Despite the slowdown, 2021 existing home sales rose 8.5% for the year to 6.1M, a 15-year high. Continued strong demand pushed the median price of an existing home up 17%, to a record $347K. At the same time, the inventory of existing homes for sale fell to 910K, a new record low. Recent increase to mortgage rates represent an additional headwind for the industry.

Housing starts surprised to the upside, reaching their highest level since February. Building permits, often viewed as a forward-looking indicator of future activity also surprised to the upside, reaching their highest level since January 2021. Combined, the reports suggest the housing sector will begin 2022 with good momentum. However, the U.S. doubled import duties on Canadian lumber in November presenting another headwind for the industry.

Weekly jobless claims jumped 55k to 286K, marking the third consecutive weekly increase, and the largest increase since July. Though unemployment now stands at 3.9%, the economy has yet to recover 3.6M of the 21.4M jobs lost in March and April 2020. Should weekly jobless claims continue to rise, that would present a conundrum for the Fed as it prepares to raise rates in an effort to cool inflation.

Of Note

Microsoft (MSFT) agreed to acquire gaming firm Activision (ATVI) for $69B in cash, making it not only the largest acquisition ever for Microsoft, but also the largest merger and acquisition deal ever for the broader tech industry.

S&P 500-5.7%
Small Caps-8.1%
Intl. Developed-.21%
Intl. Emerging-1.1%
Commodities1.8%
U.S. Bond Market0.1%
10-Year Treas. Yield1.76%
US Dollar0.5%
WTI Oil ($/bl)$85
Gold ($/oz)$1,836

The Week Ahead

  • 4Q21 GDP
  • PCE Inflation
  • New Home Sales
  • Pending Home Sales
  • Durable Goods Orders
  • Consumer Confidence
  • Weekly Jobless Claims

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