Weekly Market Guide: February 4th
MARKETS AND INVESTING
February 04, 2022
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
Short-Term Summary:
After reaching oversold conditions, in which fear indicators spiked and prices plunged too far too fast, the rebound in equities from the lows on January 24th has been constructive as the S&P 500 surpassed two significant breakdown points: the 200-DMA and the horizontal break at ~4500, and daily MACD turned higher and crossed, which often signals a positive momentum shift, fueled by earnings strength from key market-leading stocks. However, if the market fails to hold support and quickly undercuts the ~4500 level, a retest of the lows will be likely. Odds remain elevated, for now, that the low is in, but we believe returning to a new high in short order is unlikely unless the narrative shifts dramatically. Likewise, we don’t feel a meaningful move below the recent intra-day low (4222) is justified either, and we would expect back-and-forth trading as the market attempts to form a base for renewed upside, while investors gain information on the potential path of inflation and Fed policy.
The highlight over the past week has been strong fundamental trends overall for Tech. Throughout 4Q’21 earnings season, the Tech sector has posted the largest EPS surprise at 8.8% vs. the S&P 500 at 4.7%. Overall, earnings remain strong, with close to 60% of the S&P 500’s market cap having reported Q4 results up to this point. 78% of the companies are beating estimates by 4.7%- a moderation toward historical averages of 70% and 5.3% respectively. Margins continue to garner much of the focus given rising inflation. In general, operating margin estimates have come in slightly low for Q4 and into Q1, resulting in full-year 2022 operating margins estimates to tick slightly lower, however, operating margins are still expected to improve from just shy of 17% to over 17.5% in 2022.
In the coming days/weeks, we will be watching the 50-DMA (4626) as resistance along with the ~4500 level and 200-DMA 4,442 for support. Investors will continue to digest earnings with several key market leaders reporting in the coming days. Tomorrow’s U.S. Jobs report will be a good barometer of the labor market, following the ADP employment survey that suggests some downside risk. However, perception around the path of the Fed policy and inflation are likely to remain the biggest driver of returns in the weeks/months ahead. Given our belief that equities tend to overreact (up or down) to headlines and perception, we would use periods of extreme sentiment moves to be opportunistic. As sentiment turns negative and the market moves into oversold territory, we would use as an opportunity to be selective. While there remains work to do and back-and-forth trading is likely to transpire, we continue to believe the path forward is for equities to finish the year higher as the positives outweigh the negatives.
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Index Definitions
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.
The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.
The MSCI World All Cap Index captures large, mid, small and micro-cap representation across 23 Developed Markets (DM) countries. With 11,732 constituents, the index is comprehensive, covering approximately 99% of the free float-adjusted market capitalization in each country.
MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations.
MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index's three largest industries are materials, energy, and banks.
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