By Bill Hornbarger, Chief Investment Officer
Three Things to Watch
Despite the shortened week on Wall Street, the fourth-quarter earnings season heats up. High-profile companies reporting this week include Goldman Sachs, Netflix, Proctor & Gamble, and United Airlines. Forecasts for the S&P 500 overall are expected to be up approximately 20%, but investors will pay very close attention to the impacts of heightened inflation on both earnings and guidance.
This is a blackout week for Fed speakers with the FOMC scheduled to meet next week for the first meeting of 2022. Despite the lack of Fed comments, the bond market remains in focus with the 2-year note at 1% for the first time since early 2020 (pre-pandemic) and 10-year notes yielding 1.80%, up 45 bps since early December.
The economic calendar this week features updates on housing starts, building permits, existing home sales and the Philadelphia Fed Index.
Three Things to Know
The Taylor Rule, which is an interest rate forecasting model developed in the early 1990s using three inputs – an interest rate, an inflation rate, a GDP rate – currently estimates that the appropriate level for the Fed funds rate is in excess of 9%. (Source: Bloomberg)
The Federal Reserve currently owns 32% of outstanding mortgage bonds. (Source: The Market Ear)
Historically, the S&P 500 index has been resilient around the start of Fed hiking cycles. Although the index has returned -6% on average during the three months following the first hike of recent cycles, the weakness has been short-lived as returns average +5% during the six months following the first hike. Moreover, the S&P 500 P/E is typically flat during the 12 months around the first hike. (Source: Goldman Sachs)
The above information reflects the current opinion of the author. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security mentioned.
If there was a message in the first day of trading last week, it was that the market is not too concerned about the rising omicron numbers. The New Year began with a new high for both the Dow Jones Industrial Average (DJIA) and the S&P 500 Index (SPX). The new highs were not much beyond the old highs, but new records nevertheless. The “reopening” stocks of airlines, cruise lines and hotel companies were conspicuous big winners on that first day of trading. Unfortunately, the second through fifth trading days of the year didn’t go quite as well.