Published February 18, 2022
Stocks remain fully in the midst of a correction, searching for a bottom that may not come until after the Federal Reserve takes action in March. In the meantime, our friends at Delta back up and survey the broader picture to comment on market behavior during various interest rate/economic growth scenarios. We like the graphic and thought you might as well. Here it is with their commentary:
“Growing up, I had a brother who would point to the stars and yell, “Look, Kohoutek!” Kohoutek is a comet that passed by earth in 1973. Prior to 1973, Kohoutek had not been seen from earth for 150,000 years. The media played up Kohoutek as the “Comet of the Century.” When I looked up to view Kohoutek in response to my brother’s yell, he would take the opportunity to sucker punch me with some brotherly love.
The lesson learned is it is important to know what to focus on. I tried not to fall for the “Look, Kohoutek” trick too many times. I learned to focus on my brother’s hands and not rare objects in space.
In the stock market this year, we have seen cases of “Look, Omicron!”, “Look, Ukraine!”, “Look, Inflation!” and “Look, Interest Rate Hikes!” Investors have been rattled and stocks have depreciated.
But Omicron, Ukraine, inflation and rate hikes are most likely not going to be the primary drivers of the market in 2022. What will drive the market is economic growth. If the economy is expanding, we should expect positive stock market performance. If the economy is contracting (recession), we should expect the stock market to depreciate.
The chart below shows the average S&P 500 returns since 1975. On the vertical axis is real Gross Domestic Product (GDP) growth. On the horizontal axis is the trend direction of the 10-year U.S. treasury rate.
The only case when the average return of the S&P 500 is negative is when economic growth is both decelerating and contracting. A recession is technically defined as two sequential quarters of negative GDP growth.
For 2022, GDP growth is expected to decelerate from the rapid bounce it enjoyed after the Covid shutdowns. Most importantly, however, is GDP growth is expected to remain positive (no contraction). In a rising rate environment with decelerating but growing GDP, the average return of the S&P 500 for the year is 8%.
If the S&P 500 return in 2022 is average relative to the conditions in the chart, we should expect a year-end value of 5,148 or 8% higher than the its closing value on December 31, 2021. If we do attain this average level, the S&P 500 advance from current levels would be about 16%.
As a historical follow-up on Comet Kohoutek, it fell well short of expectations. The comet was tied to a doomsday event expected in January 1974. Scientists expected the comet to have a spectacular display of outgassing. None of the above happened. The media proclaimed “Comet of the Century” became a relatively non-eventful, small footnote in astronomy textbooks.”
A tough week for stock investors as market indexes fell solidly below long-term moving averages and volatile trading continued. Investors have been increasingly focused on the prospect of a Russian invasion of Ukraine, and those headlines largely dictated the mood this week. Monday saw a -0.4% decline. Russian reports of a pullback in troops encouraged markets Tuesday en route to a +1.6% relief rally. Stocks began the day down -1% Wednesday. However, in the afternoon, minutes from the January Federal Reserve meeting showed no inclination to speed up rate hikes. Investors breathed a little sigh of relief on that news, rallying to bring stocks back to flat on the day. But it was all a set up for another selloff. Thursday found stocks floundering, down -2.1% with the Nasdaq off -3%. The selling continued Friday with a late-day rally attempt failing to hold. Stocks closed down -0.6%, though well off their worst levels of the day. Earnings news this week was positive, though cautious outlooks led investors to largely sell shares despite strong reports from companies as influential as Nvidia (NVDA) and WalMart (WMT).
After a choppy effort to gain traction the past two weeks stocks succumbed this week to selling pressure. The Nasdaq 100 (QQQ) closed near the bottom of this correction’s move, off -1.60% for the week. Will this $340 level mark support for the QQQ? The S&P 500 (SPY) slid -1.41% with smallcaps (IWM) down -0.95%.
Warm wishes and until next week