Sightline Weekly Market Update: Where Opportunity Lies in The Market Pullback
Volatility remains high, but North American equities recorded a second consecutive week with posting advances for four out of five days. All indices advanced over 1% in the US, led by the Nasdaq jumping 2.38% on the week as growth stocks managed to keep pace with value stocks. The TSX leaped 2.26%, with oil closing the week over $92 a barrel, up 22.6% year to date. European equities were mixed, reacting to ECB’s suggestion that rates could increase later in the year. Except for Italy, which enjoyed a modest gain, equities fell in Germany and France in response. The Bank of England forecasted inflation could hit 7.25% and decided it was time to raise rates by 0.25% to 0.5%. The UK’s FTSE gained 0.67% on the week.
Q4 earnings announcements from two mega-cap names spooked investors causing indices’ volatility. On Wednesday after hours, Meta Platform’s (formerly Facebook) shares plunged 23%, missing earnings estimates by 5%, $3.67 on a fully diluted basis versus the estimate of $3.85. The stock declined 23%, knocking over $200 billion off the market value before recovering 1% during the day’s trading session. The company attributed the drop in earnings to the strategic shift in business revenues to Reels, a short-form video platform responding to the explosive growth in TikTok. Shares in Twitter and Snap also dropped.1 On Thursday, Amazon reported fourth-quarter profit shattering estimates in part attributed to its investment in Rivian, an EV maker. 2
In other Q4 earnings, as reported by FactSet, 56% of the S&P 500 companies have reported. Seventy-six percent reported beating estimates, which equals the five-year average, although beating earnings estimates by 8.2% is below the five-year average of 8.6%. Top contributors to positive earnings surprises were consumer discretionary (Amazon), information technology, and financials. In terms of revenues, 77% of reporting companies beat revenue estimates by 2.8%, above the five-year average of 1.5%. The energy, health care, and information technology sectors were the largest contributors. 3
In other economic news, the ISM reported the manufacturing sector grew by 57.6% in January but a 1.2% decrease from December as the economy embraced the full impact of omicron. The latest reading is a 14-month low, slightly below the economist forecast of 57.7%, and it is the third month in a row the reading has declined. A similar reading was reported in the services sector, growing at 59.9% in January but a 2.4 decrease from December. Business activity (59.9%) experienced an 8.4% decline over December’s reading. A reading over 50 indicates growth.4,5 Overall, the economy, while progressing, continues to struggle with labor, material shortages, and absenteeism due to the latest Covid variants.
The US Department of Labor reported that job openings increased by 150,000 to 10.9 million, the seventh month above 10 million. The peak came in July at 11 million. The quits rate remained stable at 2.9 %, and layoffs and discharge rate showed little change at 0.8%, a series low.6 The labor market remains historically tight, which may permit the Fed to raise rates with little impact on the labor market.
On Tuesday, the ADP employment report on small businesses showed employment dropped by 301,000 in January.7 Then, on Friday, the Department of Labor reported non-payrolls grew by 467,000 in January. While recently, the data from these two reports have diverged more than normal because of the pandemic, the difference in the latest reports reflects seasonal adjustments that occur at year-end and may not be an accurate reading of true payroll growth.8 Initial claims data showed a decrease from the previous week of 238,000, and continuing claims for all programs also dropped 73,205 to 2,067,781.9
The latest economic data is encouraging despite the slowing pace of recovery. While possibly not complete, the latest pullback is providing opportunities for cautious stock pickers, especially in the value and cyclical sectors of the economy.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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