Rebound runs into inflation, geopolitics

02/14/22
  • Broad market slips, 10-year yield tops 2% after CPI report
  • Tech lags, while small caps, energy, and materials lead
  • This week: More inflation (PPI), FOMC minutes, retail sales

The market’s rally off last month’s lows suffered a setback as traders turned cautious late last week amid hot inflation data and nervousness about the Russia–Ukraine situation.

On the heels of a two-day, 2.3% rally that included feel-good earnings beats by the likes of Chipotle (CMG) and Disney (DIS), the S&P 500 (SPX) surrendered most of the week’s gains in the wake of Thursday’s Consumer Price Index (CPI) report. An early rebound on Friday failed to gain traction, though, and bears steered stocks lower—and oil, gold, and Treasuries higher—amid reports that Russia was closer to taking military action in Ukraine:1

Chart 1: S&P 500 (SPX), 12/22/21–2/11/22. S&P 500 (SPX) price chart. Inflation stumble.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)


The headline: Inflation, international tension opens door for bears.

The fine print: The CPI rose 0.6% last month and 7.5% year-over-year—both figures above forecasts—and December’s reading was revised higher, from 0.5% to 0.6%. While it’s unlikely anyone expected a significant cool-down, the fact that price pressures continued to push their four-decade highs appeared to be enough to unnerve a stock market still smarting from last month’s sell-off. Any chance of a rebound on Friday was scuttled by the Russia story.

The number: 2%. Last Thursday the 10-year T-note yield closed above this level for the first time since July 31, 2019.

The scorecard: Small caps stood their ground—the Russell 2000 (RUT) was the only major indexes to rally for the week. The Nasdaq 100 (NDX) tech index took the biggest step back, sliding to last place for the week and the year:

US stock index performance table for week ending 2/11/20. S&P 500 (SPX), Nasdaq 100 (NDX), Russell 2000 (RUT), Dow Jones Industrial Average (DJIA).

Source (data): Power E*TRADE. (For illustrative purposes. Not a recommendation.)


Sector roundup: The strongest S&P 500 sectors last week were energy (+1.7%), materials (+1.2%, led by metals and mining stocks), and financials (-0.1%). The weakest sectors were communication services (-3.8%), information technology (-2.8%), and real estate (-2.7%).

Highlight reel: Peloton (PTON) +21% to $29.75 on Monday (and +25% to $37.27 on Tuesday), US Ecology (ECOL) +68% to $47.25 on Wednesday, BRC (BRCC) +30% to $15.64 on Thursday. On the downside, Cerence (CRNC) -31% to $43.61 on Monday, New Relic (NEWR) -28% to $78.23 on Wednesday.

Futures action: After languishing for most of the week, March WTI crude oil (CLH2) surged more than 4% on Friday on the Russia–Ukraine tensions to a new contract closing high of $93.10/barrel. April gold (GCJ2) also jumped on Friday, ending the week near a three-month high of $1,842.10/ounce. Biggest up moves: March lumber (LBSH2) +12.9%, April butter (CBJ2) +10.4%. Biggest down moves: March natural gas (NGH2) -14.7%, March E-Mini Nasdaq 100 (NQH2) -12.6%.

Coming this week

A busy calendar features the Producer Price Index (PPI), retail sales, and FOMC minutes:

Today: Consumer Inflation Expectations
Tuesday: Producer Price Index (PPI)
Wednesday: Retail Sales, Import Price Index, Industrial Production, Capacity Utilization, Business Inventories, NAHB Housing Market Index, FOMC minutes
Thursday: Housing Starts and Building Permits
Friday: Existing Home Sales, Leading Indicators

This week’s earnings include:

Today: Weber (WEBR), Medpace (MEDP), Arista Networks (ANET), Advance Auto Parts (AAP)
Tuesday: Zoetis (ZTS), Marriott (MAR), LGI Homes (LGIH), SolarEdge (SEDG), Q2 Holdings (QTWO), Airbnb (ABNB), Upstart (UPST), Roblox (RBLX)
Wednesday: Applied Materials (AMAT), NVIDIA (NVDA), Analog Devices (ADI), Shopify (SHOP), Kraft Heinz (KHC), Trade Desk (TTD), Hyatt (H), Cisco (CSCO), Boston Beer (SAM)
Thursday: Baxter International (BAX), AutoNation (AN), US Foods (USFD), Walmart (WMT), Roku (ROKU), Dropbox (DBX), Keysight (KEYS)
Friday: Deere & Co. (DE), DraftKings (DKNG)

Check the Active Trader Commentary each morning for an updated list of earnings announcements, IPOs, economic reports, and other market events.

Adjusting to a new normal

While recent market action may seem unusual to investors who got used to long stretches of everything going up (interspersed with occasional bouts of pure red), it’s helpful to remember that this week’s mixed index and sector performance is more “normal,” from a long-term perspective, than ongoing, across-the-board gains or losses.

Volatility wake-up call” noted that in this type of environment, traders and investors should avoid getting too optimistic about rallies or too pessimistic about sell-offs. Last week, Morgan Stanley Wealth Management strategists sounded a similar note last week, pointing out that despite the bounce off the January lows, the market still faces challenges, including lowered corporate profitability forecasts, potential shifts in consumer spending patterns, yet-to-be-felt effects of rising costs (inflation), and the fact that the Fed has just begun tightening monetary policy.2

That doesn’t automatically portend an extended bear market (Morgan Stanley advised looking for opportunities in defensive and cyclical stocks with undervalued cash flows), but as mentioned in this space recently, traders accustomed to sustained trends should consider the possibility that momentum—up or down—may be on a shorter leash these days.

 

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1 MorganStanley.com. Why the Market’s Rebound May be Short-Lived. 2/9/22.
2 CNBC. Dow sheds 500 points, oil jumps on fear Russia could soon take military action in Ukraine. 2/11/22.

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