The beginning of year trading saw markets experiencing a “pressure relief valve” after the strong close to 2021 was followed by fears of a hawkish Fed. Now, equity markets are finally experiencing the impacts of the supply chain disruptions, with demand for shares far outpacing supply, says Mark Hackett, chief of investment research at Nationwide, in a recent blog.
Markets had a rough kickoff to the year, but that was shortly followed by stronger-performing weeks that still remain characterized largely by volatility and uncertainty. With earnings season more than halfway over at this point, with growth tracking above what was expected but the beat rate average sitting well below its average from the last four quarters, there are concerns about peak margins. Also, despite the majority of companies beating earnings expectations, few are seeing the needle move on share prices as they report more reserved or uncertain forecasts going forward.
The disruptions caused by the supply chains are being directly reflected in equity markets, according to Hackett.
“Demand for shares is severely outstripping supply compared to where we were 18 months ago,” he writes. “Whereas supply shortages can have negative impacts on the macroeconomy, the same dynamic for stocks simply leads to changes in investor behavior. Today’s airline merger announcement is only the latest signal that companies will turn to acquisitions and share buybacks to satisfy their demand for shares, as IPO and SPAC activity continues to subside.”
Investors are bracing for upwards of five interest rate increases this year, potentially beginning as early as next month, and the Global Fear and Greed Index remains solidly within the Fear territory. Put-call ratios had a spike in momentum with investors clamoring for downside protection as economic uncertainty persists.
Last week, the S&P 500 fell briefly below its 200-day moving average before rallying to end the week stronger, but still a direct reflection of the volatility that is becoming increasingly persistent within equities.
“The bond market, however, continues to reflect a less turbulent environment than the equity market. Rates continue to tick higher, with the 10-year Treasury yield above 1.90%, but credit spreads have only widened marginally despite a surge in outflows from high-yield ETFs,” Hackett explains.
Payrolls in January far surpassed the 155,000 expectation, coming in at 467,000, with an upward revision for December from 199,000 to 510,000, and for November as well, revising to 647,000 from 249,000. Unemployment at the same time increased by 0.1% to hit 4.0%, while wage gains were 5.7% and exceeded expectations. The Job Openings report on Tuesday reported far more openings than the unemployment numbers and, combined with an anticipated high CPI reporting Thursday, all point to Fed rate increases.
“After a frantic few weeks, earnings season begins to fade as a market driver, as the pace of releases slows. Inflation will be an area of focus, with consumer price inflation (CPI) on Thursday. Other notable releases include NFIB Small Business on Tuesday and consumer sentiment on Friday,” writes Hackett.
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