Stocks and index ETFs continued to struggle after the long holiday weekend, as major averages tumbled on Tuesday amid disappointing earnings from Goldman Sachs and spiking Treasury yields.
The Dow Jones Industrial Average dropped 1.76%, while the S&P 500 slumped 1.95%, and the Nasdaq Composite lost 2.33%. U.S. markets were off on Monday for the Martin Luther King holiday.
Stocks reacted to Goldman Sachs’ lackluster Q4 earnings, which sent the stock down more than 7% on Tuesday and affected bank ETFs like the Invesco KBW Bank ETF (KBWB), which fell 2.4%. Goldman’s operating expenses rocketed 23% as the bank boosted pay for its traders and employees on Wall Street.
Treasury bonds continued to slide, causing yields to post strong gains, as they run inversely with bond prices. The 2-year yield Treasury crested 1% for the first time since February 2020, the month before the pandemic declaration that sent the U.S. economy into recession, sparking concern in investors’ minds. The 2-year Treasury is often used as a measure of where the Fed optimizes short-term borrowing rates.
The benchmark 10-year note also climbed higher, reaching 1.85%, its highest since January 2020. The 10-year yield started 2022 around 1.5% and affects the housing market.
“The bond market is continuing to price in a more aggressive policy tightening by Federal Reserve based on still-high inflation and the Fed’s more hawkish guidance,” said Kathy Bostjancic, the chief U.S. financial market economist at Oxford Economics.
“A fairly aggressive Fed tightening path will lead to somewhat lower valuations as economy-wide growth should slow as the Fed tries to soften the pace of demand,” Bostjancic added.
Earnings releases continue this week, and the post-holiday trading week will include quarterly reports from 35 companies in the S&P 500, including banks like Bank of America, healthcare giants like United Health, and streaming king Netflix.
Last week, key banks jumpstarted the earnings season on Friday, reporting better-than-expected profits. However, the market’s reaction to those releases was inconsistent. Wells Fargo shares notched a gain amid the results, but JPMorgan Chase and Citigroup fell.
Overall, 26 S&P 500 companies have reported calendar fourth-quarter earnings thus far, according to Refinitiv. Of those companies, nearly 77% posted bottom-line results that beat analyst expectations.
“Recent economic data is further confirming the economy is indeed slowing due to omicron. Retail sales, consumer confidence, industrial production, and the Empire State manufacturing all told a similar story, our economy is slowing and worries are growing,” said Ryan Detrick of LPL Financial. “This isn’t the end of the world though, as we expect any near-term slowdown of output to simply be pushed back to further quarters once the omicron worries subside.”
“I think a lot of rationality tends to come back around earnings season,” OANDA market analyst Craig Erlam told Yahoo Finance Live. “That’s when people will start to get a better grasp, or at least start to maybe look at markets through a more rational lens, and we could start to see a bit of normality return for the markets.”
Stocks and bonds have both struggled in 2022 so far, as the rapid dissemination of the highly infectious Omicron variant of the coronavirus has sparked concern over the state of the global economic recovery, and whether supply chain issues will persist or worsen. Some countries and regions reestablished lockdown protocols and other social distancing measures in an effort to stem the outbreak.
The Dow, S&P 500, and Nasdaq Composite are also all lower on the year amid worries over the recent inflationary spike over 7% and the possibility of tighter monetary policy from the Federal Reserve.
Philadelphia Fed President Patrick Harker said last week that the Federal Reserve could boost rates three or four times this year, adding that inflation was “more persistent than we thought a while ago.”
The increase in Treasury rates has also affected tech stocks, which have dropped over 4%. Big tech names like Meta Platforms, Amazon, Netflix, Alphabet, and Apple are all down year-to-date, dragging down tech ETFs like the MicroSectors FANG+ ETN (FNGS).
While traditional stock buyers have suffered, however, inverse ETF traders have rejoiced, as falling stocks translate to sizable profits for savvy investors using this method.
The ProShares Short S&P 500 (SH) gained almost 1.8% Tuesday, while the other major indices plummeted. Another highly leveraged ETF, the Direxion Daily S&P 500 Bear 3X Shares (SPXS) rallied 5.23% Tuesday, catalyzed by its triple leverage.
SPXS offers 3X daily short leverage to the broad-based S&P 500 Index, making it a powerful tool for investors with a bearish short-term outlook for U.S. large-cap stocks. Investors should note that the leverage on SPXS resets on a daily basis, which results in compounding of returns when held for multiple periods. BGZ can be a powerful tool for sophisticated investors, but should be avoided by those with a low risk tolerance or a buy-and-hold strategy.
Analysts are also touting potentially positive news for stock buyers, as in New York, the weekly average of daily new cases has been dropping since pegging a record earlier this month, according to data compiled by Johns Hopkins University. In Maryland, daily infections are also 27% lower week over week, and cases are also dipping in South Africa and the U.K.
“From an economic perspective 2022 will look like a moderated version of last year, but investors should be cognizant that the prevailing tailwinds are beginning to calm,” Charlie Ripley, senior investment strategist for Allianz Investment Management, said in a note. “Lingering effects from the pandemic are likely to bleed into 2022, but the outright threat from COVID-19 to the economy will continue to fade.”
“Risk assets will likely have positive returns in the post-COVID economy, but headwinds are picking up and performance will be choppier than in past years,” Ripley added.
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