Market Update 2-7-2022

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It was a calmer week for the markets as a whole (though Facebook shareholders may not agree) AND for economic data, but Q4 earnings season is still in full swing… and drove more than its fair share of excitement in the stock market. Get more details on earnings season, the labor market releases last week, and this week’s market update below or listen to this week’s episode of Finance Explained.

Last Week in the Market

It seems the stock market may have found its bottom, for now… The market finished the week up +1.55%, in the black for the second week in a row. However, much of that gain came on Monday, the last day of January, and was followed by a big loss on Thursday, when the market closed down -2.44%, after Facebook, aka Meta, delivered disappointing earnings guidance for the year to come and its first-ever decline in daily users in Q4. For January, despite a positive rally the last few days of the month, the S&P 500 finished the month down -5.26%, and for February, the market is down -0.33% through Friday, February 4th.

In total, the market is now down -5.57% year-to-date through February 4th. As investor interest rate expectations meet with the Fed’s actual rate increases, as inflation impacts corporate profit margins leading to downward earnings revisions, and as all those first time investors who just started investing for the first time during the pandemic get used to the market’s ups and downs through the economic cycle, be prepared for a bit more volatility in the stock market than the norm. While not as high as the week before, volatility still remains elevated relative to long-term market averages.

As anticipated following the Fed’s December meeting, bond yields continue to rise in 2022. Yields on 10-year treasuries accelerated their rise last week, rising to their highest point yet since the start of the pandemic, ending Friday at 1.910%. Yields increased across the maturity spectrum, with both 5 and 10 year treasury yields surpassing pre-pandemic rates for the first time.

Just as the Fed has indicated its intentions to raise rates, Central Banks around the world are doing the same: the Bank of England, UK’s central bank, last week raised rates for the second time to 0.5% based on predictions of 7.25% inflation by April. Recall, the Federal Reserve, the central bank here in the US, has indicated they plan to begin raising interest rates following their FOMC Meeting in mid-March.

Year-to-date, the only asset class in positive territory is Commodities (+9.9%), largely driven by rising oil prices. Oil prices, as measured by WTI Crude futures, finished the week at $92/barrel, now up over 62% vs. last year and up 22.5% since the end of 2021. To learn more about the key factors driving the increase in oil prices, be sure to catch this week’s deep dive with Head of Petroleum Analysis for GasBuddy, Patrick De Haan on this week’s episode of Finance Explained… and be prepared: as one of the most accurate fuel forecasters in the US, he doesn’t see those prices falling any time soon.

This is impacting the stock market as well, where only two sectors are in positive territory YTD: Energy, up +24.1%, driven by rising oil prices, and Financials, up +2.7%, driven by rising interest rates. Every other sector of the stock market is in the red. Growth and tech stocks continue to be hit the hardest, with the Nasdaq down -9.9% year-to-date. Why? A few reasons – 1) they had the furthest to fall, many companies being significant beneficiaries during the pandemic, making earnings comparisons and growth rates hard to maintain going forward and 2) they are most sensitive to increases in interest rates, given their high valuation ratios. When their earnings and growth expectations fall short of investor expectations, and rising interest rates compress their sky-high multiples applied to those earnings, it creates a double-whammy negative impact on their share price.

To better understand this relationship between the stock market, company earnings, valuation ratios and interest rates, be sure to check out 5 Factors that Drive the Stock Market.

Other major economic data releases for the week largely focused on the labor market.

  • Tuesday 2/1
    • Job Openings and Labor Turnover (JOLTS) for December
  • Friday 2/4
    • Employment Situation for January

We also got the usual Thursday Weekly Jobless Claims data, for the week ended January 29, 2022, as well as weekly Fed balance sheet data (to track their progress as asset purchase tapering), and the latest on mortgage rates. More on all these stories below or get the full update on this week’s episode of Finance Explained.

December Job Openings & Labor Turnover: 10.9 million job openings, 3.2% quits rate

When talking about the labor market, it is important to frame both sides of the economic equation – labor supply, represented by the people able and willing to work, as well as labor demand, represented by employer’s willing to hire.

The JOLTs report, which reports Job Openings and Labor Turnover, gives us greater insight into demand, which since the summer of 2021, remains at an all time high. For the month of December, employers reported 10.9 million job openings. This compares to approximately 6.3 million unemployed people in December, a ratio of openings to unemployed of 1.7x, meaning there are nearly 2 jobs open for every unemployed person looking.

Given the extremely high demand for labor, there is also an elevated level of voluntary separations, or quits. Quits are driving nearly 75% of job separations, and turnover is extremely costly to employers, especially in a market with a labor shortage. Employees are quitting for better pay, better benefits, and more flexibility.

For perspective, I always like sharing the full data series, which in this case dates back to 2000, along with a close-up of more recent data. Job openings, separations (fueled by quits), and the quits rate are all at or near record highs, driving rising wages, and contributing to inflation.

We will need to see this labor market shortage stabilize in order to also see inflation subside.

Next Data Point?
February Job Openings and Labor Turnover Report will be released on March 9th

January Employment Situation: +467k jobs added, 4.0% unemployment

On Friday, the Bureau of Labor Statistics released the monthly Employment Situation Report for January. If the JOLTS report gives the demand side of the labor market, the Employment Situation, which surveys both households and businesses to report employment, unemployment and labor force numbers, helps us understand the supply side of the market, or the people willing and able to work.

There were some big revisions to the employment data over the last year that also came with the January report. Many of these economic data series are based on surveys that are then translated into data points representative of the entire population, and normalized for seasonality. Those adjustments are all based on historically predictable patterns, which like many things, the pandemic dramatically impacted. Big picture – the overall trends haven’t changed, but individual monthly data points were adjusted, in some cases significantly.

For January, total nonfarm payroll employment rose by 467,000 jobs. While this far surpassed most estimates, as many expected hiring to be more impacted by the Omicron wave, the unemployment rate still increased by 0.1% to 4.0% for the month. Why? This is actually good news and news we’ve been looking for…

The unemployment rate is calculated as the number of unemployed persons divided by the number of people in the labor force. To be counted as part of both those numbers, you have to actively be looking for work within the last 4 weeks. And for January, the labor force made significant gains, with 1.4 million people returning.

Both total nonfarm payrolls (down 2.9 million vs. pre-pandemic) and the labor force (0.9 million short) are still short of pre-pandemic levels… but January was a solid step in the right direction. This is a big deal, especially given the high demand for labor currently. To fulfill it, we need people willing to go back to work! The single biggest driver of labor force decline remains women who have left the labor force – they now account for the entirety of the labor force shortfall.

In prior weeks, I have shared Census survey data that shows a leading source of women staying on the sidelines of the labor market is due to childcare struggles, which spiked again in January as a result of the Omicron wave.

This month, I took a deeper look into some supplemental data the Bureau of Labor Statistics has been collecting since May 2020, around labor and the pandemic. Many of these metrics are very telling about how unevenly the impact of the pandemic – its initial lockdowns, as well as ongoing quarantines – has fallen very unevenly in our economy, most often on those who can least afford it and those not in a position to make their own decisions.

First, they survey those who teleworked or worked at home for pay at some point in the prior 4 weeks specifically because of the pandemic. This rate, relative to the total employed, has come down significantly since May 2020, but spiked in January, due to the Omicron surge. However, the rate of teleworking or working from home varies dramatically – by educational attainment, by occupation, by race, and most interestingly, by class of worker.

The more educated you are, the more likely you are to be able to work from home: 33.6% of those with advanced degrees worked from home in January vs. just 2.8% of those with less than a high school diploma. Occupation significantly impacts this as well: 26.9% of those in managerial and professional positions worked from home in January vs. just 3.0% of those in Service positions and just over 2% of those in Construction, Maintenance, Production, and Transportation roles. The most interesting teleworking stat? More than 30% of Federal government workers and 22% of State government workers worked from home in January vs. just 15% of those in the private sector. The people most likely in positions to make decisions about pandemic protocols – managers, federal and state government officials – are also the least likely to be directly impacted by these decisions because they can continue working, unaffected.

Another telling metric from the supplemental survey? Those unable to work, either not working at all or working fewer hours over the last 4 weeks, because their employer closed or lost business during the pandemic. This measure also increased in January after steadily declining for most of the last year, with 6.0 million workers affected. But more interesting, the percentage of workers impacted but still getting paid by their employer spiked even more – now 24%. This is likely a direct result of the current labor shortage. It’s also more likely to be the case the more educated you are, with those with 34.8% of those with advanced degrees getting paid vs. 13.5% of those with less than a high school degree getting paid.

Lastly, just as with the census data, the lack of stable childcare is definitely a contributing factor to those who fall in the last supplemental survey category: 1.8 million people in January were not in the labor force and were prevented from looking for work due to the pandemic, up from 1.1 million in December. Those with children under age 18 were more than 2x as likely to fall in this category than those without children. It’s also important to note that of the 1.8 million people who said they didn’t look for a job due to the pandemic, only 681,000, a little more than 1/3, actually want a job.

So what is the overall impact of all these forces on the labor market? Rising wages. While hours fell in January for nonsupervisory employees (down -1.5%), hourly wages continued to rise, now up +6.9% over the last year, resulting in +5.4% increase in wages. While this falls short of some inflation measures, it’s still elevated and contributing to inflationary pressures.

How do these metrics ring true for your current working experience? Has your job search been impacted by the pandemic and/or lack of childcare? Have you seen your wages increase? Do you get paid by your employer if they shut down due to the virus when you didn’t before? I’d love to hear your real-life experiences and how they compare to the stats collected here. Send me a DM on Instagram or leave me a voice message at Finance Explained, and I’ll share your experiences in an upcoming podcast episode.

Next Data Point?
February Employment Situation will be released on March 4th

Q4 2021 Earnings Season: 56% Reported, 76% Beating Earnings

Based on Factset’s Earnings Insights report, so far through February 4th, 56% of S&P 500 companies had reported earnings, with 76% of those reporting beating earnings expectations, in-line with the historical average. So if companies’ earnings reports are generally in line with the norm, what’s with the market volatility?

Remember that the stock market is a leading economic indicator, and more than anything trades off of investor’s earnings expectations. As we look at analyst estimates for 2022, as well as company guidance, earning’s growth expectations are down vs. 2021.

Especially as we look at expectations for early 2022, top-line revenue growth is higher than earnings growth. This is characteristic of an inflationary environment. Revenues rise as companies raise prices, but they can’t raise them fast enough to offset the cost increases they are experiencing, leading to profit margin compressions and slower earnings growth. And Q1 2022 earnings estimates by research analysts, in most sectors, they are being revised down as companyies report earnings and earnings guidance for the coming year.

The combination of lower earnings growth expectations and rising interest rates is also leading to a correction in valuation ratios. Stocks are often valued as a multiple of their earnings, a multiple that is determined as a function of earnings growth rates and interest rates. With growth expectations falling and interest rates rising, it’s a double whammy to valuation ratios, both pushing them down, and stock prices with it. Even with this decline in valuation ratios, they are still above the 5-year and 10-year averages, so there could be more to go. The current forward price to earnings ratio is 19.7 vs. the 5-year average of 18.5 and 10-year average of 16.7.

Last week’s earnings reports by Meta (formerly known as Facebook) and Amazon highlight current investor sentiments perfectly. Meta reported its first-ever decline in daily users in the company’s history. For a growth company, with a growth valuation multiple to match, a decline in users, the main growth driver is a major expectation adjustment. Furthermore, they are taking the cash flows from the business we all know, Facebook, and aggressively investing them in a bet on the Metaverse, which so far, is just generating larger losses. Lastly, they also warned that changes to Apple’s privacy policy that happened in 2021 is likely to impact 2022 ad revenue by billions of dollars. All of those factors negatively impact earnings growth expectations, as well as valuation multiples, resulting in a more than 20% decline in the company’s share price. When a stock is priced for perfection, missed expectations hurt a lot.

On the flipside, Amazon was rewarded for delivering solid results in Q4. While many worried that they couldn’t match early pandemic growth rates, they did, and earnings overall nearly doubled. But, always read the footnotes – a big portion of the big earnings increase was driven by their ownership stake in Rivian, the company’s EV joint venture with Ford. However, their solid fundamentals were enough to persuade investors, and the stock had the largest market cap gain of any company ever on Friday.

For more on valuation ratios and how stocks are valued, be sure to check out What Drives the Stock Market.

Earnings season continues this week, with another 83 companies scheduled to report, including Peloton, Disney, Coke and Pfizer.

Weekly Jobless Claims for 1/29/2021: 238,000 new claims

Weekly jobless claims have continued to drop from their mid-January spike… For the week ended January 29th, new initial jobless claims were 238,000. This is a decrease of 23,000 from the previous week’s revised level (261,000). Continued claims for the week ended January 22nd decreased to 1.628 million, an decrease of 44,000 from the previous week’s revised level. While insured unemployment had been increasing in January, it is still a relatively low level of insured unemployment; it represents a 1.2% insured unemployed rate, unchanged from the week prior, and the 4-week average is the lowest it has been since 1973.

Remember, claims data is seasonally adjusted, so should account for the normal holiday seasonality. Recent increase in weekly claims is largely due to Omicron impacts and are subsiding along with case counts. I will continue to watch them weekly, as the closest to real-time data there is on the labor market, one of the biggest areas of concern in the current economy.

Next Data Point?
Weekly jobless claims are released by the Dept. of Labor every Thursday
Monthly Employment Situation Report is released by the Bureau of Labor Statistics the first Friday of each month

Pandemic Update

With the Omicron wave in retreat, I am going to shift to providing these updates only on a monthly basis going forward, unless more frequent updates become warranted again. I sincerely hope, for all our sakes, this is the last update on this I ever have to give…

New cases are down over 60% since mid-January, and hospital admissions are also in decline. Deaths, however, which come at a lag to new cases, continue to hold steady, but relative to the massive increase in cases we saw with the Omicron wave, continue to be at a far reduced rate relative to what we saw earlier in the pandemic.

The biggest news on the pandemic this week? Several states, including New Jersey, Connecticut and New York, have announced the end of state mask mandates, including in schools, turning decisions over to local authorities and school districts.

The Federal government and states continue to urge eligible populations to get vaccinated and boosted, as vaccination does continue to be associated with a lower risk of severe illness and hospitalization, and many regions’ hospital systems are strained given current infection rates.

Next Data Point?
CDC tracks and reports pandemic data daily via the CDC Covid Data Tracker

This week in the markets, Q4 earnings season continues, with more than 80 S&P 500 companies reporting – be aware that there may be even more volatility in the market as a whole and in individual names over the next few weeks as company’s report earnings and give guidance and outlooks for 2022.

On the economic front, Thursday morning we will get Consumer Price Index data for January, the first indicator for inflation for the month.

For this week’s podcast deep dive, do not miss my conversation with Patrick DeHaan, a 20+ year petroleum industry expert and the Head of Petroleum Analysis for GasBuddy. He will answer all your questions about oil prices: where they may be headed, how they impact gasoline and other energy prices, who produces the most, and the impact of everything from politics to foreign affairs on oil.

Questions about this week’s update or recent financial headlines? Tune in to Live Q&A with Family Finance Mom every Monday and Wednesday at 9AM ET on Instagram. Look for the question box in stories to leave your questions, or watch and ask them live.

Thank you for sharing!

About Meghan

Meghan spent nearly a decade as a Financial Analyst, before spending the last 7+ as a SAHM to three little ones. She shares simple money tips for moms to help your family reach your financial goals by building a financial plan you can LIVE with! You can learn more about her background in finance, catch her daily on Instagram and Facebook, and her weekly live discussions in her community for Family Finance Moms.

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