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Hammer — Week of January 31, 2022

Written by Steve Orr, Chief Investment Officer, and Mark Frears, Investment Advisor

index wtd ytd 1-year 3-year 5-year index level
S&P 500 Index 0.79 -6.93 18.67 20.92 16.15 4,431.85
Dow Jones Industrial Average 1.34 -4.36 15.58 14.68 14.07 34,725.47
Russell 2000 Small Cap -0.97 -12.30 -5.65 11.55 8.86 1,968.51
NASDAQ Composite 0.02 -11.96 3.95 26.29 20.64 13,770.57
MSCI Europe, Australasia & Far East -3.53 -5.63 4.93 10.06 8.14 2,203.51
MSCI Emerging Markets -4.20 -3.21 -9.71 7.72 8.18 1,192.06
Barclays U.S. Aggregate Bond Index -0.43 -2.20 -3.10 3.83 3.09 2,303.38
Merrill Lynch Intermediate Municipal -0.89 -2.29 -1.90 3.22 3.18 312.78

As of market close January 28, 2022. Returns in percent.


Bear markets are grinders, moving steadily lower amid pauses and temporary rallies. Corrections are usually very sharp and do not travel as far. We are in correction territory both in speed and distance down. Mid-term election year Januarys have a reputation of being uneven, but this correction is all about the Fed. Or after last week’s press conference, about Chairman Powell’s remarks. 

Markets were sort-of confident the Fed would raise rates in quarter-point steps. Powell stated that a decision about half-point or quarter-point steps had not been made. Equally unsettling was the statement that the Fed could raise rates at every meeting. Over the weekend Atlanta Fed President Bostic repeated both points. Either statement would have been enough to push traders to the exits. Both at once will create uncertainty until at least the March meeting. 

Friday was the seventeenth day of the correction. Most of these selling squalls last between 17 and 25 days before finding a bottom. The charts suggest the major indices were looking for a near-term bottom last week. We would like to think that last Monday’s big swing down during the day was the capitulation bottom. Of course, we will only know in hindsight. Strong earnings and excellent economic growth provide a sound foundation for markets to find a footing once Fed unease dissipates.

The first three weeks of the year, traders and stocks were hammered down at speeds reminiscent of March 2020. Last Monday’s nearly 5% swing on the day may be the capitulation low. The day’s price action formed a “hammer” candle pattern that usually marks a stop in a (down)trend. Friday’s rally was more position cleanup than trend change. Now that the “FedUnEase” of “maybe half- maybe a quarter-point” and the possibility of raising rates at every meeting is now known, traders can turn their attention to earnings and Congress.

First Pass

Even with plenty of releases coming out this past week, they paled in comparison to the FOMC meeting. While economic news is still positive, there is still the concern that the Covid-19 impact is not done. The Conference Board Consumer Confidence release came in at 113.8, up from an expected 112, but down from the previous month’s increased reading. The Present Situation improved, but Expectations (based on short-term view) declined from the previous month. Durable Goods Orders declined last month.

The first estimate of fourth quarter U.S. Gross Domestic Product posted a 6.9% growth rate. Personal Consumption increased slightly also. The details of the GDP report showed an inventory buildup accounting for 4.9% of the increase. While this was not actual consumer spending, it is creating products that the consumer can buy in future periods. The strong fourth quarter estimate pulls GDP growth for all of 2021 at 5.5%. The economy is still growing, and consumer demand is strong. 

Slower Rate

Inflation is still a concern, especially given the FOMC’s view on the need to potentially raise rates sooner and higher to combat higher prices. The Personal Consumption Expenditures (PCE) monthly release is watched closely by the FOMC and is tracked in their quarterly Summary of Economic Projections. With this monthly update, the fourth quarter core PCE came in at 4.56%, slightly higher than the FOMC’s median of 4.44%. The FOMC expects this to drop to 2.7% for 2022.

We are seeing signs of peaking inflation and prices rising at a slower rate. As we look back to measurement from first quarter of 2021, Consumer Price Index was only averaging 0.4% per month and as we do year-over-year comparisons, these will start to drop. Supply chains are easing as seen in the Institute of Supply Management supplier deliveries index dropping to its lowest level since November 2020. We also saw a decline in the ISM Prices Index in December, to the lowest level in over a year. As the demand/supply comes more into balance with slower growth and increasing supplies, the rate of price increases should moderate.  

Speaking of Slower

First Friday of the month is “jobs Friday.” Employers surveyed the week of the 10th likely added 150,000 jobs. The household unemployment rate should hold steady at December’s 3.9%. An economy that should grow 3.5% this year should be adding more workers. A slowing number of new jobs each month should be a concern, if other indicators were turning down. Frankly, my dear, the country is running out of workers. 

The job openings data tomorrow morning will show 10.3 million openings around the country. We are wondering why the BLS bothers with job openings. They have stayed above the 10 million level since April of last year. 

On Track

One-third of the S&P 500 have reported through last Friday. Fourth quarter results are right on track, with 77% of the reporters beating analyst estimates. Positive surprises are averaging about 4% above estimates. Beating analyst estimates by just 4% may not sound like much, but remember these companies are very closely followed by a large analyst community. That level is also right on the long-term average for positive surprises. 

Positive surprises also lift the average earnings of the index. At the end of December FactSet estimated fourth quarter earnings growth at 21.4%, today its 23%. Earnings growth combined with 10% to 15% price declines have reset price to earnings valuations from upper deck to reasonable for much of the U.S. stock market. Yardeni Research forward P/Es for S&P 500: 19.7x, Growth 24.9x, and Value 16.5x. Note the big FAANG names hover around 29x earnings, down from 38x back in 2020. 

108 S&P names report this week. NXP Semiconductors reports after the close today and may provide some insight on chip supplies. ExxonMobil, UPS, GM and Google (Alphabet) report tomorrow. Merck, ConocoPhillips, Ford and Clorox round out a busy week. 


Stocks are finding a bottom, adjusting to the reality of (slightly) tighter monetary conditions. Most indices are back to October levels. Short-term bonds are moving higher in yield. Gold and longer-term interest rates are signaling that inflation in the coming years will not be as big of a concern. 

We liked stocks last fall when inflation was 4% to 5%. Inflation will head back to those levels in the next few months. The Fed always raises rates too late in the cycle. Markets are trying to figure out if it will raise too far or too fast. We think the Fed is as nervous about stock market values as inflation and may raise rates fewer times than traders expect. 

Steve Orr is the Executive Vice President and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary’s University School of Law. Follow him on Twitter here. Mark Frears is an Investment Advisor at Texas Capital Bank Private Wealth Advisors. He holds a Bachelor of Science from The University of Washington, and an MBA from University of Texas - Dallas.

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