Growth stocks grew, what’s next

Stocks forged higher on Friday after posting earlier losses on a triple-witching day. Existing home sales were down leaving investors wondering whether it is the beginning of a trend as mortgage rates rise.

A new leaf?  I am sure that I don’t have to tell you that 2022 has been a tumultuous year for stocks.  We ended 2021 on a high note, but not after skirting a bumpy pass which presented itself in early fall. It is only natural to assume…to hope that the momentum higher would continue. However, what we ended up with appeared to be a rush to the exits. We all knew that interest rate hikes were coming. We all knew that inflation was not going to give up so fast. Despite all of 2021’s craziness and volatility, the S&P500 still managed to gain nearly +27%, which is far greater than the long-term average gain for the index. Perhaps some investors decided not to tempt fate and take their profits off the table. Taking them in the new year means the capital gains butcher bill would not have to be settled until tax time 2023 for some filers.

There was also a peculiar move in bond yields in the final months of 2021. After an initial rise in 10-year Treasury Note yields, they ultimately closed the year around 1.5%, below their 2021 peak of 1.74%, when most analysts were predicting those yields to be above 2%. After all, it was quite clear that rates were going to be on the rise and inflation was on the increase. That didn’t take too long to rectify itself once 2022 came around as rates quickly pierced through the magical 2% ceiling by mid-February…only to dive back to the 1.72% in the wake of the Russian invasion of Ukraine. The relationship between yields and growth stocks is purely theoretical, meaning, just because yields are going up, it doesn't mean that growth stocks cannot continue to climb if they continue to perform as they have in the past. Despite that relationship being purely theoretical, it has influenced growth stock prices in the past several months. Higher yields have put pressure on not just technology shares, which are mostly growth stocks, but also on growth stocks in the healthcare and consumer discretionary sectors. To put a finer point on it, the S&P500 Growth Index was down by -17.33% as last week’s trading began, while the broader S&P500 was down by a lesser -11.79%.

Last week, that would all change. As we started the week, the Russian invasion of Ukraine intensified and with it the death toll on both sides.  We witnessed horrific views of centuries-old cities being reduced to rubble in an instant, leaving refugees struggling to find safe harbor. On-again, off-again talks between the two sides seemed to yield nothing but further confusion. With no end in sight, analysts began to calculate the inflation impacts of embargoed Russian crude and the commodity, along with other Russian commodity exports, jumped higher, raising further the specter of inflation. It was also Fed week in which the Federal Reserve announced, as expected, its first rate hike since 2018. Stocks responded by rallying…wait what? Why would stocks rally as rates went higher, inflation is looking like it might get worse, and there is a nasty war going on in Europe? One theory is that the market had already factored in the Ukraine crisis while the path of rate hikes, already predicted by futures markets, was confirmed. Ok, but is that enough to cause the S&P to post its greatest weekly percent gain (+6.16%) since November of 2020?

The fact of the matter is that rates will be going higher with futures and even the Fed predicting 6 to 7 more rate hikes before the end of the year, inflation is bad, and the Ukrainian conflict can only add to inflationary pressure. That would, it would seem, add to the possibility for the economy to struggle a bit, which in most cases would cause longer maturity bond yields to pull back, which they haven’t. The yield curve has flattened, which is another indicator of tough times ahead. Still, stocks rose. Are the markets acting irrationally? I would like to remind you that at the worst point in the pandemic, stocks were on the rise, and we had to remind ourselves that stock prices represent the future…beyond the current calamity. It could very well be that stocks are now looking beyond the Ukraine war and even the interest rate hikes. That is plausible, but if it is, in fact, true, the next few months will not be without further volatility as inflation is likely to get worse before it gets better, the Ukrainian conflict takes many more turns in both directions, and another corporate earnings season begins (in April).

Yes, indeed, spring started yesterday, and while it typically ushers in a time of growth and nicer weather, it does not typically happen without some setbacks…and even in some years, snow.  Last week left us with refreshing gains in a tough news cycle, which is to be applauded, but we still need to remain vigilant. 

FRIDAY’S MARKETS

Stocks ended a volatile week on a positive note as hopes loomed that talks between Russia and Ukraine were moving forward. The S&P500 gained +1.17%, the Dow Jones Industrial Average climbed by +0.80%, the Nasdaq Composite Index jumped by +2.05%, the Russell 2000 Index advanced by +1.02%, and the S&P500 ESG Index added +1.24%. Bonds gained and 10-year Treasury Note yields pulled back by -3 basis points to 2.14%. Cryptos gained +2.20% and Bitcoin advanced by +2.53%.

NXT UP

• Chicago Fed National Activity Index (Feb) is expected to come in at 0.54 after coming in at 0.69 in January.
• Fed Chair Jerome Powell will speak today.  Atlanta Fed President Raphael Bostic will also speak today.
• Nike will announce earnings after the closing bell.
• In the week ahead we will get more regional Fed reports, more housing numbers, Durable Goods Orders, flash PMIs, and University of Michigan Sentiment. Please refer to the attached economic release calendar for times and details.