It was a volatile week for stocks, but they seemed to have found a bottom, at least for now, thanks to a Friday rally. At these inflection points, it is always worth a bit of reflection. As an investor, were you content the past few weeks knowing that market volatility is normal, or did you feel unsettled about what each day will bring?
One thing we know for sure about the future is that it is unknowable. It is okay to be unsettled about what the future may bring, but it is important not to let those concerns drive investment decisions. Even if one were to somehow know with certainty that some event would happen in the future, that might not be enough to know how investment assets will respond. For example, had we known that the world would be engulfed in a pandemic for multiple years and that large portions of the US economy would be shut down for extended periods of time, most would have predicted disaster for equities. As we know from the past two years, the opposite was true.
The point is that you do not need to be a fortune teller to be a successful investor. A successful investor sees the past few weeks as normal volatility and sees the opportunity in such moves. What opportunities?
- The opportunity to purchase attractive assets at a lower price,
- The opportunity to potentially sell some securities at a loss to reduce your tax bill, and
- The opportunity to rebalance from higher-performing assets in your portfolio to lower ones (sell high, buy low).
So the next time that unsettled feeling begins to take hold, remember that volatility is normal, and volatility is opportunity.
Headlines This Week
US stocks managed to finish the week flat after several failed attempts to rally. The Fed provided some additional commentary, we received a new data point on inflation, and earnings season continues.
A Hawkish Fed
The Fed put out its monthly Federal Open Markets Committee statement on Wednesday, providing additional insight into their thoughts on liftoff (rate increases).
- The statement appears to set the stage for a March rate increase.
- Comments about the strength of the economy, high inflation, and a tight labor market open the door for a potentially aggressive tightening path.
- Chairman Powell did not push back against the idea of a 50 bps rate hike or a hike every meeting (typically, rate hikes have been in 25 bp increments).
On Friday, PCE inflation was reported, giving us more insight into the pace of price increases.
- Core year-on-year inflation was up 4.9% compared to 4.8% expectations and last month’s 4.7% figure.
- The report also provided insight into wage pressures which were weaker than expected.
- There is some expectation that this could be marking the peak point on these inflation measures.
Ultimately stock valuations are driven by the ability of companies to make a profit and grow their earnings. This week we had a big earnings release from Apple (AAPL).
- A third of companies have reported thus far, with most still surprising to the upside.
- The big one this week was Apple. Unlike Netflix (NFLX), which we highlighted last week as disappointing, Apple beat expectations and had encouraging guidance.
- The company produced record revenue despite some supply constraints and stated that it expected supply constraints to improve in the first quarter. That has positive implications for many companies.
The Week Ahead
The Bank of England (BoE) will meet next Thursday and is widely expected to raise its central rate again.
- After the bank’s first interest rate increase in December to 0.25%, the central bank is expected to increase rates by another 0.25%, bringing the country’s rate to 0.5%.
- The bank is being pressured to tighten its monetary policy as inflation is at record levels while the labor market is strong.
- Policymakers had previously indicated that once the bank rate reaches 0.5%, the bank would also start to shrink its balance sheet, which could start to drain liquidity out of the market.
Staying the Course
The European Central Bank (ECB) will meet Thursday and is expected to stick to the recent trend of not signaling any changes.
- The European economy has been sluggish as the labor market is still far from unemployment which has helped keep inflation in check.
- If inflation keeps rising to levels seen in the US and UK, the ECB might be forced to step in and start raising rates.
The headline for American economic data will be the nonfarm payrolls number on Friday, amongst other releases that will garner some attention.
- The last two jobs reports of 2021 indicated slower than expected jobs growth as the economy added 199k and 249k jobs in December and November, respectively.
- Consensus estimates are that the US economy added 238k jobs in January, with unemployment staying at 3.9%.
- Other numbers that could give an even clearer state of things are wage growth, labor force participation rate, and the unemployment rate, all out on Friday.
For those checking in on company earnings, next week will continue with the biggest names reporting.
- The rest of the tech giants will report, including Alphabet (GOOG) on Tuesday, Facebook/Meta (FB) on Wednesday, and Amazon (AMZN) on Thursday.
- Some other names to look out for next week include Exxon Mobile (XOM), Alibaba (BABA), UPS, Royal Dutch Shell (RDS), General Motors (GM), and Ford (F).
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