The S&P 500® The index had its first positive week of the new year, and it took a strong rally in its largest component on Friday for that to happen. Apple jumped 7% on Friday after reporting higher-than-expected earnings, leading the index to gain 2.4% overall. For the week, the index gained 0.8%, but for the year to date it remains 7.0% lower. Apple has an even larger weighting in the Nasdaq Composite index, which climbed 3.1% on Friday, also leading to its first positive week of the year, but only by the slimmest of margins, up from 0.01%, leaving it lower on the year by 12 percent.
Overall, the fourth quarter earnings season has started well. According to Factset, about a third of S&P 500 companies have reported results so far, and 77% reported better-than-expected results. Earnings growth for the quarter is now on track to reach 24.3%, compared to 21.4% at the end of the quarter.
Market price in five rate hikes in 2022; Credit spreads continued to widen
But last week, the focus was on the Fed. In his post-meeting press conference, Chairman Powell made it clear that the Fed would likely begin raising rates in March and left open the possibility that subsequent rate hikes would follow more aggressively than expected. As a result, markets are now pricing in five-quarter-point rate hikes and a year-end federal funds rate of 1.25-1.50%. And while he focused on interest rate policy, he also indicated that discussions would continue regarding when to start winding down his balance sheet. In response, the yield on the two-year Treasury note ended the week at 1.16% and at the start of this week it is trading at 1.20%, up sharply from its close of 0, 99% the previous week. In contrast, the ten-year note was virtually unchanged on the week, rising only one basis point to 1.77%, and is trading at 1.78% at the start of the week. The 2-10 year yield curve has now flattened to just 58 basis points.
Credit spreads also continued to widen. The ICE Bank of America High Yield spread widened 32 basis points to 361 last week. It started the year at 310 basis points. The move in the BBB spread was more muted, climbing just seven basis points to 133, after starting the year at 121. These moves suggest the bond market is getting the message that conditions are tightening, but not yet at a cause for concern, and that the Fed appears to be rapidly catching up on perceptions that it has lagged the curve relative to inflationary pressures.
Evidence shows that Omicron has slowed economic activity; Unemployment expected to show slow gains
There was more evidence last week that the Omicron variant has slowed economic activity. The composite flash PMI fell sharply to 50.8 in January from 57 in December, with most of the slowdown occurring in the services sector. Durable goods orders in December also fell more than expected, as did the University of Michigan’s consumer confidence indicator and the Conference Board’s consumer confidence index. Pending home sales also fell. And both the headline and core PCE deflators edged up. However, the news last week wasn’t all bad. Fourth-quarter GDP easily beat expectations, rising 6.9% from the expected 5.5% rise, and for the second month in a row, new home sales also easily beat expectations. Additionally, the seven-day rolling average of new Covid infections has continued to decline and is now down 36% from its peak in mid-January.
This week’s calendar is headlined by the January jobs report. It is expected to post job creation of just 150,000, which would be the slowest in thirteen months. The unemployment rate is expected to remain at 3.9%. And the ISM PMI should drop slightly. It’s also a big week for earnings, with a fifth of S&P 500 companies expected to report, including Alphabet, Meta Platforms and Amazon. Investors are also watching rising tensions between Russia and NATO over a possible invasion of Ukraine. Brent crude oil closed above $90 a barrel last week for the first time since 2014.
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The products of Technology companies may be subject to stiff competition and rapid obsolescence, and their stocks may be subject to greater price fluctuations.
A rise in interest rates may cause the price of fixed income instruments held by the fund to fall, negatively impacting its performance and net asset value. Falling rates may cause the fund to invest in low-yielding debt securities, reducing the fund’s income and yield. These risks may be heightened for securities with longer maturities and durations.
A 10-year Treasury bond is a debt security issued by the United States government that matures in 10 years.
A 2One year treasury bill is a debt security issued by the United States government that matures in 2 years.
the personal consumption expenditure (PCE) measures of the prices that people living in the United States pay for goods and services. The PCE price index is known for capturing inflation (or deflation) across a wide range of consumer spending and reflecting changes in consumer behavior.
the ICE BofA High Yield Index uses an index of below investment grade bonds (those rated BB or below). This data represents the value of the ICE BofA US High Yield Index, which tracks the performance of corporate debt denominated in US dollars below investment grade and publicly issued in the United States. Marlet.
the shine reading of GPA is an estimate of the Manufacturing Purchasing Managers’ Index (PMI) for a country, based on approximately 85% to 90% of the total PMI survey responses each month. Its purpose is to provide an accurate advance indication of the final PMI data.
the ISM manufacturing indexalso known as the Purchasing Managers Index (GPA) is an estimate of the manufacturing industry for a country, based on approximately 85% to 90% of the total Purchasing Managers’ Index (PMI) survey responses each month. It is considered a key indicator of the state of the US economy.
the Consumer Confidence Index (ICC) is a survey, administered by the Conference Board, that measures the degree of optimism or pessimism of consumers regarding their expected financial situation.
Past performance is not indicative of future results.
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
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