At the end of the day, interest rates are going to have to move higher, and companies with high multiples will have to trade lower. With costs such as wages rising, there will be increased investor focus on sectors that can better handle those inflationary pressures, with less latitude for companies which promise future growth but which currently generate negative cash flow.
On Monday, three Fed policy makers offered their views on the future path of policy. Mary Daly, president of the San Francisco Fed, said that the central bank’s coming rate hikes should be “gradual and not disruptive.” Meanwhile, Esther George of the Kansas City Fed said sharply reducing the central bank’s almost $9 trillion balance sheet could allow the Fed to pursue a less aggressive strategy on short-term interest rates.
Their colleague, Raphael Bostic of the Atlanta Fed, reiterated that he expects three quarter-point hikes for 2022. He also said he doesn’t prefer a half-point rate hike in March, but wants to keep available options open.
“Between the amount of volumes that we saw and the massive swings that we saw in markets, the volatility really felt like it had a crescendo,” Art Hogan, chief market strategist at National Securities, told CNBC.
“Crescendos usually happen when you’ve got a massive amount of capitulation and everything is for sale,” Hogan added. “For most of the month we would see money coming out of growth but going into cyclical. Then that would unwind and growth would catch a bit. That was all true until this past week. We’ve seen a bit of the aftermath of that storm, and that seems to be more stabilization.”
Last week, the Fed indicated that it will likely start raising rates in March to combat historically high inflation. That would be the central bank’s first rate hike in more than three years. Markets are now pricing in at least five quarter-percentage-point interest rate hikes in 2022.
Tech shares were some of the hardest hit in January, as investors feared higher rates would expose their lofty valuations and raise their operating costs. Investors were rethinking that notion a bit as the month ended, especially after a dramatic pullback in the stocks.
Netflix and Spotify surged more than 11% and 13%, respectively, on Monday upgrades from Citi. The firm cited this month’s pullback as an attractive time to buy. Netflix still dropped nearly 30% this month, and Spotify lost by 16%.
Tesla, which dropped 11% in January, gained more than 10% on Monday after Credit Suisse upgraded the electric car maker’s stock. The firm said Tesla had been unfairly caught up in the market decline. Other EV makers rose too, with Rivian and Lucid adding about more than 15% and 8%, respectively.
Nvidia shares climbed 7% after being hit hard in January. The chip stock finished the month down 16.7%.
MKM Partners chief market technician JC O’Hara emphasized in a note Monday that while market bottoms aren’t single-day events and there’s still a 30% chance new lows could form, investors should trust the bottoming process.
“We continue to believe the economic conditions are favorable and the recent weakness is not a systematic problem, but rather a valuation reset due to the swift change with investors’ expectations for the future path of rates,” O’Hara said. “A shock, not a top.”
The S&P 500 at one point this month had dipped into correction territory on an intraday basis, but the recent comeback has pared the loss from its all-time high to 6.3%. The Nasdaq Composite is still off by 12% from its high, firmly in correction territory.
Over the weekend, Atlanta Fed President Raphael Bostic told the Financial Times the central bank isn’t ruling out raising interest rates by half a percent, versus the typical quarter-point move, if inflation remains high. He himself is calling for three quarter-point interest rate increases in 2022, starting in March, he said, adding that a more aggressive approach could be necessary depending on how economic data evolves.
By: via @AlliesFin Serve Stock Market
