Published March 18, 2022
The question below, “Could we be near a market bottom?”, posed in the most recent letter from Blaine Rollins, coincided with what appeared to be a complete washout in European and Chinese, stocks. Whereas the emergence of the Omicron strain of coronavirus may have kickstarted the negative market proceedings back in November, the more recent events have mostly been happening outside the U.S. with the war in Ukraine and China’s covid crackdown adding further fuel to the downtrend.
In both cases, the market has rebounded sharply this week.
Also this week, we finally reached the long-awaited March Federal Reserve meeting. As expected, the Fed began raising interest rates, projecting six rate hikes this year, thus providing some cover should conditions deteriorate (e.g. they can easily reduce this projection to support markets).
With the Fed perhaps reducing interest rate uncertainty, and investors feeling a bit better about Europe and China, maybe the worst is over for investors. Here are some reasons for optimism:
First, the segment from Blaine Rollins showing that January-February market swoons often are followed by market strength in the remainder of the year.
Second, acknowledgement by Wells Fargo that inflation comparisons will become much more benign as the year rolls along. In other words, these +7% inflation readings should not continue and will revert to a more typical 2-3% reading a year from now.
While inflation comes down, wages have taken a step jump in some areas, outrunning inflation, as jobs remain plentiful and economic growth solid.
All of this while fund managers hold a very high level of cash; money available to fuel a new bullish run in stocks should sentiment turn more positive.
Were that sentiment to improve, the credit spread we showed last week would relax back downward. That would be a sign of something more than just a short-term rebound. Stay tuned!
Stocks continued falling Monday as a fresh Covid shutdown in China added to the market’s list of worries. The Nasdaq slid -2% on the news while the Dow Industrials bucked the negativity to post a flat day. Chinese stocks were hammered again Tuesday. But a fall in oil prices back below $100 per barrel appeared to diminish inflation concerns and drive investors back into stocks. The broad market S&P 500 snapped higher by +2.1% with the Nasdaq posting a +3% rebound. The gains continued Wednesday when the Fed announced their long-awaited increase in short-term interest rates. The inflation-fighting tone of Fed Chair Powell’s remarks lit a fire under stocks sending the market higher by +2.2%. The gains were padded another +1.2% Thursday despite an +8% rebound in oil prices. Interest rates continued their four-day climb with the 10-year yield popping above 2.2%. However, investors ignored the rise seeming to welcome the clear direction set by the Fed of six more rate hikes this year. Stocks closed the week with another +1.2% gain Friday on the sheer momentum of the four-day rally.
Whether a classic bear market rally or the beginning of a new market uptrend only time will tell. For the week, the S&P 500 (SPY) surged +6.15% to return to its 200-day moving average. The Nasdaq 100 (QQQ) rebounded +8.35% to retrace a month’s worth of losses. Smallcaps (IWM) rose +5.36% to the upper end of its two-month long trading channel.
Warm wishes and until next week.