by Bryan Perry

February 23, 2022

Last week’s stock market volatility was pretty much the summation of several negative influences converging on the investing landscape all at once. There was the fever-pitch tension between Russia and Ukraine; some hot inflation and retail data prompting rising fear of even more aggressive Fed action than has already been priced in; the dictator-like action by Canadian Prime Minister Trudeau on domestic truckers; some high-profile earnings misses by what are now former Wall Street darlings; and the ongoing buy and sell program manipulation by high-frequency trading firms that roil a market trying to stabilize.

The NASDAQ is now down 16% from its November high, accentuated by a big spike in volatility associated with January options expiration. That tech-rich index has fallen in six of the past eight weeks, to where even the most-stout earnings champions of the fourth-quarter reporting period have given back the lion’s share of their post-earnings gains, so the market is either in the rinse or spin cycle at this point.

You know it’s a challenging market when West Texas Intermediate (WTI) crude oil trades above $95 per barrel and the oil and gas stocks put in the worst performance among the 11 market sectors for the week.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Even an hour-long CNBC interview with ARK Funds CEO Cathy Wood on Thursday couldn’t save her flagship ARKK Innovation ETF (ARKK) from plumbing a new low on Friday, down 57% from its 52-week high. Several of her holdings are the latest earnings disasters to blow up after missing estimates. This market has zero patience for high price-to-sales stocks that fail to beat big and guide strongly higher.

With all these high-profile headlines crossing the tape and jarring investor confidence, it’s my view that this correction is on the verge of having exhausted itself, especially now that the greatest of blue-chip stocks have been sold off. In most corrections, the soldiers (small caps) get shot first, then the sergeants and lieutenants (mid-caps), and then the colonels and generals (large cap) get shot last, but this market is at a stage where the five-star generals are now at levels that wouldn’t exist under any other circumstances.

When the market’s top brass gets taken out, that’s a time-tested indicator that the worst of the selling is about to cease, leading to a bottoming process, followed by a new leg higher. Here are my reasons why:

  • With 84% of the S&P 500 companies reporting earnings for Q1, a healthy 77% came in above consensus estimates (source: FactSet Earnings Insight, February 18, 2022)
  • The Omicron variant of COVID is ending in the U.S., so consumer spending should accelerate.
  • Supply chain disruptions should get back to normal in the next six months.
  • Bond yields will very likely price in the future of Fed tightening by the end of May.
  • The consumer is in a good place. There are 10 million job openings, and employers are struggling in a very robust labor market. That bodes well for improved economic activity.

The outlier is inflation, not a war in Ukraine. The FactSet briefing of February 18 noted that among the S&P 500 company quarterly conference calls, only 18, or just 4% of companies, mentioned “Ukraine,” where more than four times as many, 77 companies, or 17%, noted “inflation” on their earnings calls.

Of the S&P 500, only one company noted more than a 4.4% revenue exposure to Russia and Ukraine:

The boogeyman within the inflation situation is wage growth, which is here to stay, following across-the-board increases in hourly pay and the cost of skilled new hires in almost every industry. Commodity inflation can fester a long time as global demand increases even though the supply chains are running more smoothly, but the market can handle modest inflation because sales earnings growth is expanding.

However, there is some growing concern that oil prices won’t back off, as in the following commentary:

“Oil could easily go to $150. Demand is stronger than it ever has been in the world, and OPEC and OPEC+ is going to run out of capacity by the end of 2022. And that’s even been stated by several OPEC and OPEC+ countries, so that’s ignoring the Iran and the Ukraine situation.”  –Pioneer Natural Resources (February. 17,2021)

Put the pieces together and it seems the market will be contending with inflation on dual fronts for some time – from both wages and oil prices well into 2023 – while other components of inflation will ebb as a result of smoother running supply chains. How much impact the Fed raising rates by 1% over the next year will have is hard to tell, as it is such a small increase relative to inflation, currently running at 7%. At the same time, the Fed must keep rates historically low or risk blowing a hole in the federal budget.

The yield on the 10-year Treasury note was below 2% for all of 2021. Now it is above 2%. The CBO projects that the Treasury Yield will rise to 3.5% by 2030, but even if it falls next year and peaks at 2.8% and annual deficits shrink, the burden of debt service in the federal budget will more than double by 2030.

It’s pretty clear that the challenge the Fed faces – to manage these massive future outlays for interest that will more than double as a percentage of the federal budget by 2031 – brings to mind the topic of monetary inflation and the future value of the dollar. It’s not a big risk now, but certainly a growing one.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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