The path of least resistance for the Market has been lower to start this young year. But stocks caught a big bounce over the last few days of January and into February. Buy the dip returned, supported by oversold conditions and extremely depressed investor sentiment. Financial conditions are still supportive, despite expectations of the Fed tightening. But for the first time in quite a while, it was earnings that drove stock prices. Fundamentals still matter. Corporate America is hanging in there. That is very important.
The Bull case continues to revolve around very strong consumer demand. But persistent supply chain and input price pressures are exacerbating the scrutiny around peak profit margins. With the unknowns of the virus, it’s hard for management teams to provide clear guidance. It’s a wait-and-see environment with a downward bias. Then the Titans of Tech took center stage. Google led things off.
Google knocked it out of the park. Alphabet (Google’s parent company) reported major beats on earnings and revenues, demonstrating again why it’s a Tech Titan. Revenue grew 41% in 2021, surpassing $250 Billion for the first time. CEO Sundar Pichai said that Alphabet’s focus for 2022 will be on “evolving our knowledge and information productivity” and that investments in areas such as artificial intelligence “will be key” throughout the year. The Alphabet leader also said they are investing heavily in Artificial Intelligence and Blockchain, with plans to apply them across company platforms. This put a charge back into Tech, which has been beaten down big time.
The big headliner for Google, no doubt, was the announcement of a 20-for-1 stock split. That always gets investors happy, even though it provides zero increase in value to the company. Splits just make stocks more marketable because 1 share can be bought with fewer Dollars. It also makes it easier to trade options. Perhaps most significant, this is a move that will likely land Google in the Dow.
Earnings Season took a U-turn after Google. Facebook shocked the system with perhaps its worst Qtr as a public company. The stock fell 26% on the news. It triggered a major sell-off in Tech. The declines were deep and broad. It dented whatever positive sentiment the Market took hold of over the previous days. Then came Amazon.
Amazon didn’t just knock it out of the park, the company knocked it out of the zip code. Amazon’s profit was $27 per share, which absolutely blew away the $3 estimate. Amazon Web Services led the charge with 40% growth in the Qtr. Amazon has been spending aggressively to secure its positioning and it seems evident that 2022 will be the year it bears fruit. The company also increased its Prime membership from $119 to $139 per year. The move will help cover higher wages and transportation costs. The Street applauded the move knowing few people will terminate their Amazon membership. Amazon is a way of life in America.
Amazon’s stock jumped 13.5% on Friday, putting another charge in Tech. In fact, it set a record for the largest single-day gain for a company in American history. Amazon increased in value by $191 Billion in just 24 hours’ time. It came the day after the company formerly called Facebook set the record for the largest single-day decline. Mark Zuckerberg lost $29 Billion in net worth on Thursday. Conversely, Jeff Bezos saw his increase by $20 Billion on Friday. These are some really big numbers.
Earnings Season is officially halfway complete. Thus far, the growth rate for profits in Q4 stands at 25.5%. That is up from the 21.7% expectations at the start of the Season in January. Nearly 80% of companies have exceeded estimates for earnings, which is largely in line with the 5-year average. The size of the beats have come down as the comparisons get tougher. Remember, last year had some very easy comparisons with the washed-out levels from 2020. Comparisons in 2022 are going to be even tougher.
Corporate America continues to highlight strong demand from its customers. They still face the after effects from supply chain strains, but they seem to be improving. Apple was quick to point that out last week. Inflation is still a big issue with input pricing pressures high, squeezing profit margins. It also makes it tough to set expectations for the future. The number of companies issuing positive guidance has fallen sharply compared to the October Earnings Season at 55 vs 165.
A better than expected Job report initially took the wind out of the sails of a Friday rally. That was a surprise. The Job Market is tough to gauge because Omicron shut so much down in January. But the virus didn’t slow down job creation last month. 467K jobs were created in January. That was well ahead of estimates for a mere 155K gain. It turns out that December and November were better than previously thought as well. Last month’s 199K was revised substantially higher to 510K. November went to 647K from the originally reported 249K. They need a new mechanism. That’s not new.
The strong Job Report suggests things are improving economically, setting up for a healthy recovery in the Spring. That would be a major positive for the US Economy. It also means that the Fed might go bigger in its tightening campaign. It sent yields higher with expectations that the Fed will indeed be a hawk. The 10-Year Treasury yield hit 1.9%. The 2-Year hit 1.3%, pricing in 5 rate hikes. That move hit stocks early Friday morning. But the Amazon effect kept a bid under the Stock Market, which ended the week in the green, despite the wide swings. It’s been a Hell of a week for investors.
The Beijing Winter Olympics officially kick off today, but you wouldn’t know that from the advertising campaigns. Many companies are facing pressure to acknowledge China’s abuses of human rights and authoritarian control. Top American sponsors like Coca-Cola, Intel, and Visa are laying low in their Olympic-themed commercials. You might have noticed, there hasn’t been much in the way of Olympic commercials leading up to the Games. In fact, those who are advertising have largely steered clear of mentioning the location of the Games or any hint of politics. That is wildly different from Olympics past where ad Dollars are spent aggressively, coveting the eyeballs and the Olympic spirit. NBC can’t be pleased.
These Olympics will be anything but ordinary. The Olympic torch was lit last Fall in Olympia, Greece, the site of the ancient Olympic Games. It normally takes a highly publicized journey around the Globe to reach the Olympic host city. This year, the torch had just a 3-day run in and around Beijing, before lighting the bird’s nest where it will reside for the duration of the Games. The Olympic torch scaled the Great Wall and was passed between 1,198 human hands and 2 robots. I’m guessing that’s a first.
The US government is boycotting the 2022 Winter Olympics, meaning diplomatic personnel will be absent. Most of our allies are boycotting too. Rest assured, American athletes will be competing in full force. But the seats will be empty and the streets will be quiet. China maintains its Zero Covid policy, the strictest approach to the virus on the planet. There will be one familiar visitor to the Beijing Games. Russian President Vladimir Putin will be among those greeting Chinese leader Xi Jinping today and attending the opening ceremony. Russia and China have developed a cozier relationship in recent years. They have a common bond; Dislike and distrust for America and the West.
Back to the Market:
Volatility continues. A strong rally to start the week hit a Meta wall Thursday, but rode into the weekend in the green on the back of Amazon. It’s been risk on, risk off, risk back on. This part of the cycle has been nothing but turbulent. Get used to it. It sure seems like Bear Market activity. Bear Market rallies tend to be the most explosive.
Rising rates and heightened inflation still have a grip on this Market. The Fed is reducing the money supply and is expected to increase interest rates next month. Earnings Season has brought some things to like, but uncertainty remains. We like what we see ahead in the Spring and Summer. But there’s a lot of space between now and the March Fed meeting. Getting there is going to be the challenge. Keep those belts buckled.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
