Three Minute Digest for February 5, 2022

Ann Miller |

Markets were higher for the week, as the Dow Jones Industrial Average was up 1.1%, the S&P 500 gained 1.6%, and the Nasdaq Composite jumped 2.4%. … even with a very volatile and scary Thursday for tech stocks.

The technology-heavy NASDAQ fell (3.7%) on Thursday in its largest one-day declines since September 2020. The S&P 500 lost (2.4%,) the Dow Jones Industrial Average fell by (1.5%). Facebook parent Meta lost $252 billion in market value, the biggest one-day value drop in stock market history, after weaker-than-expected user growth and revenue reports. Several other companies have missed revenue or earnings estimates, revised down future earnings estimates, and/or cited compressed margins due to higher labor costs.

Three Thoughts for the Markets:

  1. Corporate Earnings Will Be Challenging

Companies’ future earnings forecasts are not as strong as they had been, and fewer companies are beating earnings estimates.

  1. Bonds and Interest Rate Sensitive Securities

Federal Reserve is likely to begin rate hikes in March

With inflation at its highest level in decades. The Fed has signaled, and the markets expect rates hikes in the overnight Fed Funds Rate. This rate is a bellwether for interest rates in general. Interest rates for consumer loans, such as auto loans and business loans, may rise as the Fed hikes rates. Loans tied to short-term interest rates—like auto loans or credit cards—tend to be more sensitive to changes in the fed funds rate than mortgage rates, which are tied to long-term Treasury yields.

  1. Stock and Bond Markets will be More Volatile

We believe volatility is here to stay for each quarterly earnings season and through the mid-term elections in November. The Russia / Ukraine situation is certainly a potential catalyst for event-driven market volatility. We believe that Russia would not act during the Olympic Games now beginning in China. While Russia covets Ukraine and China claims Taiwan, they see common ground in cooperation. China views the Games as an important bridge in building international relationships and Russia would not likely disrupt an international high point for their neighbor and increasingly friendly ally. But … it’s a coin toss.

Market volatility is unsettling, but historically not unusual at all. Most attempts to time the markets for long-term investors is difficult at best and history tells us that common-sense portfolio management is key. We sold numerous positions earlier in January including a tech heavy fund. Our portfolios average 12% in cash which we believe will serve us well in seeking opportunities during this ongoing volatility. We have been positioning our portfolios for higher rates and greater volatility through much of 2021.

Finally, Ignore the Noise! The TV news will shout twice as loud over a 100-point drop as they will a 200-point gain. Don’t misunderstand, we know that a loss in your portfolio is not “noise,” but we also understand that over time, volatility helps us to also enjoy our gains.

As always, please feel free to call with any questions.