Stocks jumped higher this morning after plunging into the close yesterday afternoon. It’s clear that the market is attempting to rebound following a bad stretch of trading that began back on January 5th, when the S&P sunk 1.92%. Spiking yields drove the major indexes lower as tech stocks suffered the worst losses.
Today, however, tech led the charge higher. Tesla (NASDAQ: TSLA) climbed 4% alongside Zoom Video (NASDAQ: ZM). Treasury yields were up, too, but not in a major way. If rates continue to climb slowly, it’s likely that tech (and the general market) would still be able to rally.
“After a rough start to 2022 and one of the worst starts ever for the Nasdaq and tech stocks, buyers are willing to step up and buy what could be some nice bargains,” said LPL Financial’s Ryan Detrick.
“Earnings season is early, but overall, we are looking at another solid quarter from corporate America. Yes, with rate hikes coming, we are dancing a delicate line and experiencing some normal market volatility, but the underpinnings of the economy remain quite solid.”
And while it’s true that earnings have mostly met expectations, many companies provided guidance predicting headwinds in 2022. It doesn’t help that stubborn supply chain issues have persisted, and according to the most recent unemployment fillings data, labor remains extremely tight.
Jobless claims totaled 286,000 last week, hitting a near 4-month high while greatly surpassing the estimate of just 225,000 claims.
“The surge in jobless claims and drop in existing home sales has lead to some easing 10-year bond yields which could reflect some reduction in the degree the Fed could tighten – certainly dampens speculation of a 50 [basis point] rate hike in March,” explained Kathy Bostjancic, Oxford Economics’ chief US economist.
“Moreover, we are in for more volatile markets due to the heightened degree of uncertainty surrounding the economic, inflation, and interest rate outlook.”
It’s all well and good to point to the economy as evidence that the market will continue to rise this year despite sky-high inflation. It also makes sense to believe that robust corporate earnings should help share prices climb further.
But even if the economy remains strong in the face of inflation and earnings beat expectations, both will happen during a period of hawkish monetary policy. The last time the Fed tried to tighten was in 2018, which preceded a major year-end correction that lasted several months.
That’s not to say stocks won’t rally in the short-term, though. Yesterday, the S&P closed below the 100-day moving average. The last eight times this happened, the index ripped higher in the weeks that followed with 100% accuracy.
Will it happen again, though? It could. But keep in mind that those eight S&P rebounds all occurred while the Fed was uber-dovish.
The index had yet to close below the 100-day moving average while monthly asset purchases were being tapered and rate hikes were being discussed. So, although bulls are certainly playing the odds by buying the dip this morning, it could also end in tears if they’re not careful.
The market’s tolerance for pain these days is extremely low. The first sign of trouble is often met with rapid, reactionary selling. And now that the S&P is once again trading near key support at the December lows, another dose of negativity could easily drop the market into a longer-term correction as an assumed March rate hike draws closer by the day.