Medicare Agent News: Wall Street Isn't Sure What Comes Next

Tuesday, February 8, 2022

Wall Street Isn't Sure What Comes Next

By Nicholas Jasinski | Monday, February 7

Baffled Strategists. Stock indexes lost momentum this afternoon, fading into the close to finish flat or modestly below water. The debate on Wall Street over the market's next move rages on.

The S&P 500 closed down 0.4% today, and is now down about 6% year to date. The Nasdaq Composite fell 0.6%, extending its 2022 loss to 10.4%. And the Dow Jones Industrial Average finished about flat today, holding on to its 3.4% year-to-date decline. It has been a more volatile stretch lately for all three indexes than during most of the past two years.

J.P. Morgan chief global markets strategist Marko Kolanovic expects current bearish sentiment to ease going forward, and for inflows to the market from funds and corporate buybacks to dampen the recent volatility. Some of 2022's expected turbulence in markets may have simply come earlier in the year than many investors were prepared for.

"The market’s inability to rally on Friday’s strong payroll data, and generally poor stock reactions to fourth-quarter results despite healthy earnings delivery, illustrate the overly bearish market sentiment at the moment," Kolanovic wrote to clients today. "However, we see volatility moderating and expect strong equity inflows from systematic investors (e.g. risk parity, volatility targeting), as well as corporate buybacks that are increasing after recent earnings-related blackout periods."

Other strategists aren't as bullish, such as BofA Securities' head of US equity and quantitative strategy Savita Subramanian. BofA economists now expect to see seven quarter-point interest rate increases from the Federal Reserve in 2022, as the central bank battles inflation. That's a headwind for stocks and other relatively risky assets, but better than runaway inflation that cuts into earnings and valuations.

"The pivot from super dovish to more hawkish policy underscores that we are at the point of peak liquidity," Subramanian wrote today. "But other factors are more concerning—some of which would be addressed by more aggressive rate hikes."

Still, Subramanian argues, even if the risk to the stock market would be greater if the Fed did nothing, it is still about to begin raising rates with a stocks at pricey valuations. Last time that happened, in 1999, the result was a sharp decline in price-to-earnings multiples and a bear market.

As for fundamentals this fourth-quarter earnings season, things haven't been so bad—some high-flying technology stocks aside. And it's not just past results. RBC Capital Markets' head of U.S. equity strategy Lori Calvasina pointed out that, with more than half of results in, bottom-up forecasts for S&P 500 earnings per share in 2022 and 2023 have both moved higher, as upward revisions to forward expectations have outnumbered negative revisions.

But investors haven't been rewarding that performance. Calvasina wrote today:

For reporting season as a whole, stock price reactions haven’t been great. Indeed, 47% of the S&P 500 companies that have reported so far have seen their share prices fall 1% or more in the one day trading session immediately post results. But this stat has continued to improve. Two weeks ago it was tracking at 63% and a week ago it was tracking at 53%.

The resiliency of earnings solidified a bit more over the past week, supporting the rebound in the S&P 500 that’s been in place since the Jan. 27 low despite considerable intraday volatility, some high profile misses, and sharp moves in high profile individual names. With a fair number of consumer discretionary, health care, and tech names still set to report in the coming weeks, it’s still possible that the earnings backdrop will take a negative shift. But for now, the resiliency of earnings remains a comforting data point and supports the idea that we’ve seen the lows in the stock market for the time being.

Morgan Stanley's chief U.S. equity strategist Mike Wilson is more pessimistic about the path of earnings. In a report today, he pointed to rising goods inventories and declining consumer confidence, both of which could mean less demand for products later this year.

"The key question now is whether we are going to return to 'normal' or will we experience a period of under earning first--i.e. payback?" Wilson wrote today. "We have long held the view that payback was coming in the first half of 2022 as the extraordinary fiscal stimulus faded, monetary policy tightened, and supply caught up with demand in many end markets."

He favors a defensive portfolio positioning, and prefers stocks in the health care, real estate, and financials sectors.

Overall, there's no clear consensus among strategists these days about the near-term path of valuations and stock prices, and plenty of disagreement about the path of earnings and the economy over the longer term.

It's a recipe for more volatility and days like today, when the market just can't seem to find a convincing direction.