This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
Don’t Rush In
Technical Morning Meeting Comments
by Piper Sandler
Jan. 20: Technical damage continues to mount across the [
], as investors reprice rate-hike and inflation risk. The index broke below its lower Bollinger Band (4,566) yesterday and violated support off the September highs (4,537). The next downside support levels to watch are 4,513 (the December low), the 4,500-point milestone, and 4,480 (the mid-August high). Momentum remains bearish, with limited signs of oversold conditions. Only around 13% of SPX stocks are currently trading with an RSI [relative strength index] reading of 30 or lower. Breadth is holding up relatively well. As of yesterday, 60% of SPX stocks were above their 200-day MA [moving average]. We recommend that investors wait for support to be established and for momentum to improve before buying the dip.
—Craig W. Johnson
Focus on Industry Leaders
Equity Investment Outlook
by Osterweis Capital Management
First Quarter: As a result of higher secular inflation and the Fed’s shift from an ultraeasy money policy to a more hawkish stance (to combat inflation), it appears rates are poised to rise.
Typically, stocks tend to do well in the early stages of a rising interest-rate cycle (though volatility may also increase), as higher yields generally correspond to an expanding economy and rising corporate profits. It is not until the late stage of the cycle —when the Fed raises rates more aggressively, pushing the economy into recession— that stocks are hurt. We believe we are far from that point, perhaps several years away. However, higher rates are likely to put some downward pressure on equity valuations, particularly the very elevated valuations of certain high-tech companies, suggesting a shift from growth to value.
With interest rates still near 30-year lows—real rates are actually negative—stocks still appear to be relatively attractive, especially those with steadily rising dividends. Given the likelihood of higher inflation, it is especially important to focus on companies with pricing power, which will enable them to maintain or improve profit margins in an inflationary environment. The key to stock selection over the next few years will be investing in competitively advantaged companies operating in growing industries where profits, free cash flows, and dividends are all rising. Often, this means owning industry-leading companies.
—John Osterweis and Larry Cordisco
Job Growth Looks Solid, but…
Economic & Financial Market Commentaryby Maria Fiorini Ramirez Inc.
Jan. 20: Initial unemployment claims for the week ended Jan. 15 were up 55,000, to 286,000, from a slightly revised 231,000 in the preceding week. The median forecast was for a modest decline to 225,000, so the outcome was far above that.
We caution that weekly seasonal adjustment, which is never an easy task, becomes much more difficult in the holiday period through late January. It seems rather clear that the [latest] jump in seasonally adjusted claims was exaggerated greatly by a seasonal adjustment process that “expected” a far greater decline in unadjusted claims than the 83,000 drop that was recorded. This can be the result of many factors, although we would assume that at least some was due to the temporary impact of the Omicron Covid-19 variant. The four-week moving average of seasonally adjusted initial claims was 231,000 in the Jan. 15 week (up 20K from the preceding week’s total).
Continuing claims (reported with a one-week lag) totaled 1,635,000 in the week ended Jan. 8, up 84,000 from 1,551,000 a week earlier. While also subject to weekly volatility, continuing claims ought to remain in a downtrend, as job growth stays solid and [unemployment insurance] recipients continue to exhaust their eligibility.
Recent volatility notwithstanding, the overall picture painted by the data points to a rapid pace of job growth. With the supply of labor still constrained, payroll gains, while solid, nonetheless are falling short of what they would be if businesses could hire as many workers as they wish.
Stocks’ Slump Is Prelude to Their Robust Recovery
Market View 360
by Tigress Financial Intelligence
Jan. 20: U.S. stocks continued to trade lower on Wednesday, as the near-term path of least resistance remains to the downside. Stocks are still dealing with expectations of higher rates and their potential impact. However, [companies’] pricing power remains strong, driven by solid demand. December housing starts increased 1.4%, to [an annualized] 1.702 million, coming in better than the 1.650 million expected, the fastest pace since March 2021 and the second-best increase since September 2006. And new Omicron cases show signs of peaking in many hot spots around the U.S.
Expectations for a strong postpandemic cyclical recovery, driven by a further increase in consumer spending and inventory restocking, and an expected ramp-up in capital investment, should start to overcome concerns over Fed tightening and be the market’s upward driver once this near-term correction runs its course.
And Here’s the Good News
Navellier Market Notes
by Navellier & Associates
Jan. 18: The uncertainty of where interest rates will reach equilibrium finds money moving to the sidelines in the stock market. The good news is that
[has kicked off] the fourth-quarter announcement season [with strong numbers]. This is essentially the first of wave after wave of better-than-fourth-quarter results that I am expecting to propel growth stocks higher.
Ironically, the Biden administration’s popularity is ultralow, despite strong GDP growth. This is because inflation is the No. 1 problem. Consumers are becoming increasingly frustrated every time they go to a gas station or grocery store. Businesses are finding it harder to plan, and prices of key components continue to rise. In the end, this uncertainty causes businesses to raise their prices, which creates even more inflation, especially as services costs rise.
To break the back of inflation, the Fed has to engineer a “soft landing,” which is easier said than done. Its toolbox is compromised; if it raise key rates too much, the interest burden on the almost $30 trillion in federal debt will be unmanageable. So, inflation hedges, like residential real estate and growth stocks, are expected to remain an investor oasis.
A Saying for Today
Out of the Box
by B. Riley Securities
Jan. 18: For the past 12 months the consumer price index increased 7% while the producer price index increased 9.7%, which provides us an average number of 8.35%. If you consider the equity returns for the past six months, and then the last month, you will note that everything, adjusted for inflation, is underwater. The same can be said for bonds. I think that 2022 will be a much more difficult year than 2021 for investors. Choices will require more care, and thoughtful deliberations may take a longer period. [As famed investor Peter Lynch put it:] “Know what you own, and know why you own it.”
—Mark J. Grant
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