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Volume 11, Edition 5 | January 31 – February 4, 2022

What Investors Can Learn from Groundhog Day

Doug Walters, CFA
Groundhog day may seem like silly superstition… and it is, but there are lessons to be learned for investors on Phil’s big day.

Contributed by Doug Walters, Max Berkovich, David Lemire

Wednesday was Groundhog Day, and Punxsutawney Phil saw his shadow, so according to legend, winter will extend another six weeks. This winter has not been great for investors, so let us hope his powers of prediction do not extend to the stock market! This superstition may be silly, but there are lessons to learn from Groundhog Day.

Investors are not immune from superstition. Every year we have to endure media references to sell in May and go away, the Santa rally, SuperBowl winners, as goes January so goes the year, and the hemline effect. These superstitions range from the unfounded to the ridiculous. There is not much to learn from them other than how to data-mine spurious relationships, but we can learn something from Groundhog Day… the movie that is.

If you are unfortunate (or fortunate?) enough not to have seen the 1993 Bill Murray classic, Groundhog Day, it is about an intolerable newscaster, Phil, who is condemned to repeating the same day again and again. At first, he becomes increasingly miserable but then uses the opportunity to better himself. It did not occur to me the first time I saw it, but he was apparently in this time loop for decades. The movie does not make this clear but based on the skills he picked up, like French, ice sculpting, and piano, estimates are that he was iterating on this day for decades if not centuries.

As investors, we do not have the luxury of reliving a day to better our returns. But like Phil, we do have the ability to learn from the past. Such is the way of the evidence-based investor. History does not repeat itself, but it often rhymes, and therefore, we can learn from the mistakes and successes of those before us. Avoiding market timing, taking advantage of market volatility, and steering clear of speculation are prime examples of these lessons from history.

Headlines This Week

US stocks ended a rocky week in positive territory despite a big slide on Wednesday. Corporate earnings were a big driver of sentiment, but jobs reports also made some headlines.

Remember the Tech Titans

Netflix (NFLX) started the earnings season for the high-profile tech names on the back foot a couple of weeks ago. It seemed the “pandemic winners” might be in trouble, but it has been a mixed bag since then.

  • Meta Platforms (FB), formerly known as Facebook, saw its shares fall over 25% on its earnings report. Investors were not pushing them for the name change but rather for their admission that other social platforms like Tik Tok were eating significantly into their growth.
  • Amazon (AMZN) was dragged down with Facebook on Thursday but rebounded off the back of their own earnings report, ending the week up over 10%. A big earnings beat and the continued success of its cloud business impressed investors.

A Tale of Two Jobs Reports

Two jobs reports were out this week which pointed in opposite directions.

  • First up was the ADP payroll report on Wednesday. Expectations were for a 200K gain, yet a loss of around 300K jobs was reported.
  • On Friday, the more comprehensive Non-Farm Payrolls report was released. The report came in at a positive 467K, much higher than the 155K consensus. In addition, the past two months were revised up by a combined 700K+ jobs. Perhaps most encouraging is that the participation rate ticked up further. Low participation has been one of the challenges of the pandemic.
  • These are notoriously volatile reports, so one month does not make a trend, but Friday’s report, with the revisions, does move the needle.

467,000

Nonfarm payrolls rose 467,000 in January, well ahead of the 155,000 Wall Street estimate. Source: U.S. Bureau of Labor Statistics

The Winter Soldier

On Wednesday, the original winter soldier, Punxsutawney Phil, ran scared from his shadow signaling another six weeks of winter.

  • Phil may be onto something, as a large swath of the country was buried in ice and snow over the past few days.
  • In Utica, we have a good 18″ of fresh powder. Time to hit the slopes!

The Week Ahead

Waiting for the Peak

January’s inflation numbers are out next Thursday, with everyone waiting in anticipation to see where the numbers will end up.

  • The consumer price index (CPI) is expected to keep climbing and hit 7.2% for January, up from 7% in December.
  • The only relief is that it appears the rate of inflation growth seems to be slowing, as the month-on-month rate is expected to come in at 0.4%, which would be the lowest it has been in four months.
  • The market will be keen to see when inflation will finally plateau as it will almost certainly dictate how strong the Fed will respond once tapering ends in March.
  • In addition to the CPI readings, other domestic data points for next week include the initial jobless claims on Thursday and the Michigan Consumer Sentiment Index on Friday.

Stunted Growth

The 4th Quarter GDP estimate for the United Kingdom will be out on Friday with expectations that the Omicron variant prevented the British economy from gaining any momentum.

  • Projections for Q4 GDP growth are at 1.1% quarter-over-quarter, which is at the same pace as Q3.
  • The more significant concern, though, is that a contraction of -0.5% for December is forecasted, showing that Omicron has undoubtedly started to pump the brakes on any further growth.

Another Busy Week

Earnings season rolls on as more big names are set to report.

  • Companies to look out for include Pfizer (PFE), Peloton (PTON), Toyota (TM), Disney (DIS), Uber (UBER), Coca-Cola (KO), and AstraZeneca (AZN).

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