So much for New Year cheer, optimism over US markets faded fast this week as investors dumped shares in many of the technology companies that surged during the pandemic. At the UK close on Friday (7 January 2022) the S&P 500 is facing a near 2% weekly decline while the tech-laden Nasdaq Composite is staring at a 5% slap in the face.
The looming spectre of higher interest rates pressed investors to push the rotation button and buy stocks more tightly linked to economic recovery.
Minutes from the last 2021 US Federal Reserve meeting, published on Wednesday (5 Jan), show the regulator is inclined to a quick increase in rates and a fast tapering of government bonds even though economic activity is still affected by the Omicron variant.
‘The possibility that the Fed could accelerate down the path to monetary policy tightening has been a main catalyst of the weakness in stocks, along with persistent inflation pressures,’ spelled out analysts at broker Charles Schwab.
| US markets this week | ||
| S&P 500 | Nasdaq Composite | |
| -2.02% | -5.06% | |
| Dow Jones | Russell 2000 | |
| -0.05% | -2.56% | |
| Prices at 7pm UK time, S&P 500 7 January 2022 | ||
The pressure crank was tightened again on Friday with another mixed non-farm payroll report. It showed December job growth severely missed forecasts, even though the unemployment rate dropped much more than expected, putting US equity markets back on the defensive.
‘Overall, the data are consistent with our expansion economy scenario of continued growth in the mid-part of the economic cycle, but global growth will be slower, and inflation will be higher in 2022,’ said HSBC analysts. So far, stock markets have been quite resilient to the rising expectation of policy tightening, but a faster pace of rate hikes remains a big risk for stocks
‘Our baseline scenario is that investors should remain pro-risk in portfolios but need to be realistic about lower returns and higher volatility in investment markets in 2022.’
Treasuries are mixed in the wake of the employment data, and the US dollar is falling, while crude oil prices are dipping, and gold has turned higher.
The rampant rotation can the seen all too clearly on the stocks front, where drugmaker Moderna and Covid test processor Quest Diagnostics, which fared well last year, are down 13% and 9% respectively, in 2022. Contrast that with strong 2022 starts for stocks tied to the economic upswing, such as banks and energy, where S&P sectors have risen 11% and 5.5% respectively this week.
Companies in the travel and leisure industry, among the hardest hit during the pandemic, have also risen, with shares in American Airlines and United Airlines, as well as cruise operator Carnival, moving higher.
Stock of the week: GameStop
Meme stock GameStop was back in the news this week after reports emerged that the computer games retail chain is planning to ump into the non-fungible tokens, NFTs for short, and cryptocurrency rings.
Apparently, ‘people familiar with its plans’ said the moves are being made as part of a turnaround effort by chief executive Matt Furlong. Last month, Furlong said alongside GameStop’s quarterly earnings that the company was exploring ways of getting into NFTs and blockchain technologies.
Quite how or why remains a mystery for now but investors were happy to back the speculative move, with a wave of buyers sending the stock soaring 13% intra-day, before most of that froth was lost to the wind leaving the stock among the S&P 500’s worst performers this week.
Reported this week: Walgreens Boots Alliance
UK investors well know high street pharmacy and healthcare chain Boots, it’s on many British high streets and in most shopping malls, and its parent company Walgreens Boots reported upbeat first-quarter results for the financial year to 30 November 2022 on Thursday (6 Jan) thanks to strong demand for Covid vaccines and testing kits.
Both adjusted earnings and revenues beat quarterly expectations, up 53% and 7.8% respectively having administered 15.6 million Covid vaccinations and 6.5 million tests. The fly in the ointment, like many large international businesses, is rising staff costs, something to keep an eye on.
| Big movers this week | |||
| Ford Motor | 20.3% | Humama | -22.3% |
| Murphy Oil | 19.1% | Spectra Energy | -15.6% |
| Allegheny Technologies | 18.6% | GameStop | -14.5% |
| Hess Corp | 17.6% | L Brands | -14.1% |
| Schlumberger | 17.3% | New York Times | -11.5% |
| Prices at 7pm UK time, S&P 500 7 January 2022 | |||
