Don’t Buy the January Dip Just Yet

Stocks opened higher this morning following a wild bout of premarket trading, in which futures plummeted alongside Chinese equities before surging in response to newfound economic optimism. Fourth-quarter Gross Domestic Product (GDP) in the US leaped 6.9% year-over-year according to the Commerce Department. By comparison, economists expected an annual increase of just 5.5%.

“The Q4 GDP report was a nice upside surprise in a string of recently underwhelming economic data points,” said Glenmede’s vice president of investment strategy, Mike Reynolds.

It was a huge “beat” to be sure of it, but not necessarily great news for bulls as the bond markets priced in a potential 5th rate hike this year. The yield curve collapsed, too, as the spread between short-term and long-term Treasurys slimmed dramatically.

Perhaps the most concerning GDP data point, however, had to do with product inventory. Despite stories about bare shelves across the country, Q4 saw the second-largest inventory restocking level in history. This trend won’t hold moving forward, which could severely limit GDP readings in 2022.

Jefferies economists Thomas Simons and Aneta Markowska, on the other hand, believe heightened inventories are here to stay.

“The silver lining in today’s report is that the supply side of the economy is starting to catch up to demand, as evidenced by the large inventory build in Q4,” the Jefferies economists wrote.

“Although inventory levels are still low, they have clearly inflected, which should begin to take pressure off inflation fairly soon.”

The market just endured a disappointing earnings season. If we’re right (and the Jeffries economists are wrong like they were about inflation), GDP growth should slow in Q1 of this year as inventory levels remain restrained. That will only make the Fed’s already tough decision even more difficult.

Overall, Q4’s GDP number was certainly impressive, but it was driven primarily by a near-historic increase in inventories. This suggests that, sadly, Q4 2021 may have been the peak for the US GDP for quite some time.

On Wall Street, though, the dip-buying rhetoric has come back in full force as analysts eschewed the Q4 GDP report’s details in favor of its far more palatable headline number.

“We believe it’s now time to take advantage of the pullback opportunity and put sidelined funds to work in favored sectors,” explained Scott Wren, senior global market strategist at Wells Fargo Investment Institute.

“This is the type of market where longer-term opportunities often present themselves.”

Traders called Wall Street’s bluff shortly around noon, however, as the major indexes all gave up the majority of their morning gains. The tech-heavy Nasdaq Composite even flipped negative on the day in response to rising rate hike expectations.

So, as is usually the case, it’s probably a good idea to wait before buying into the current dip. Until the S&P is able to put together a few positive trading sessions in a row, it stands at risk of plunging further. And with key support at the October lows lingering nearby, a breakout lower could result in another rapid downturn, no matter how many times Wall Street urges investors to buy back in – something most banks did back on January 10th, just a few days prior to the S&P falling over 7%.


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