(Please enjoy this updated version of my weekly commentary published February 10^th, 2022 from the POWR Stocks Under $10 newsletter).

This past week, the market was basically range-bound with the S&P 500 trading between 4450 and 4590. What’s interesting is that we did see strength in some of the lagging parts of the market like small-caps and tech as the Russell 2000 was up 4% and the Nasdaq 100 was up 2%.

There are times when I believe that these inter-market relationships are meaningful, but I’m not willing to read too much into last week’s small-cap and tech outperformance given months of underperformance as a bullish omen.

Nor am I seeing anything too meaningful regarding the S&P 500’s second rejection at the 4,600 level nor today’s bearish reversal.

As we discussed last week, this is going to be a choppy market given the torrent of bullish and bearish headwinds that will certainly frustrate many traders and investors.

Normally, in these commentaries, we dive into a big-picture topic and then connect it to our overall investing strategy. I think this week it would be more appropriate to dive into a variety of important topics that comprise these “headwinds”.

Earnings

Entering Q4, there were doubts about whether or not we would get another strong earnings season. In fact, if you look at the equity gains of 2021, all of it could be attributed to earnings growth given that multiples slightly compressed.

Needless to say but Q4 is going to be another strong quarter for earnings. So far, 55% of companies have reported in the S&P 500 and 76% have topped beat earnings expectations and 77% have topped analysts’ expectations.

More importantly, analysts entered Q4 thinking that earnings growth would be 21%. Now, estimates are for 29% growth.

This has been one of the most potent bullish headwinds for the market at this time.

Inflation

It’s kind of funny how in a low-inflation world, the most important economic release was the jobs report but in a high-inflation world, the most important release is the monthly CPI.

I do think inflation is a bearish headwind especially if we dig into the report we can see that all the components that saw deflationary pressures from the pandemic are already seeing rising prices such as insurance premiums and rents. These tend to be much “stickier” inflation components, while the transitory elements remain elevated.

These developments are leading the market to aggressively increase its estimates for the number of rate hikes in 2022.

Economic Growth

Currently, growth expectations for Q1 growth are 0.7% according to the Atlanta Fed. Consumer spending is expected to slow as last quarter’s Q1 featured the stimulus payments.

At the same time, economic growth has been in acceleration mode since Q2-Q3 of 2020. So, a bout of falling but positive growth is likely.

My concern, and to be clear this is a low-probability occurrence, is that we are going to experience a deceleration in growth while the Fed tightens, sparking recession fears.

I actually see the economy as being too resilient to fall into a recession, but I do acknowledge that *fears* of this could materialize.

At this time, it’s something to monitor not worry about.

The Fed

Of course, the biggest wildcard is how the Fed interprets all these factors, and how much pain it’s willing to inflict to really tamp down inflation.

Does it fear inflation so much that it could “choke out” the recovery? Or will it be more of a “boom-flation” type story with higher rates of growth and inflation than typical. And, inflationary pressures could ease if/when the supply chain and transportation bottlenecks actually resolve.

My bet is on the latter, while the Fed will do everything it can to “tighten” policy without impacting the economy.

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All the Best!

Jaimini Desai
Chief Growth Strategist, StockNews
Editor, POWR Stocks Under $10 Newsletter

SPY shares were trading at $443.58 per share on Friday afternoon, down $5.74 (-1.28%). Year-to-date, SPY has declined -6.61%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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