There’s a lot of talk, especially in the news media over the weekend and last week, around the uncertainty between Russia and Ukraine. While that is a very important topic, it is something that the markets have less history on and that we have less control over. As a result of this, we really want to focus domestically on areas where we have good market history and more of an understanding of how this may impact the markets long-term and less on the short-term with issues of global geopolitical events that are almost impossible to predict. Internally, it looks like the US economy is still growing and doing very well. Around 70% of the S&P 500 companies have reported earnings and those earnings have been very strong. Year-over-year we’re seeing a 31% increase in earnings which helps explain how the market could do so well. How can the market go up so much and not be too expensive? That’s because earnings have grown at an extremely fast pace that has kept the market from getting overpriced. When we look at the future, not just the past 12 months, what could earnings look like? The chart shown in the video for this episode came from Strategas Research Partners and shows the trailing 12-month earnings versus the peak 12-month period in earnings for the different sectors of the economy. You can see where we may see more growth. In the Energy sector, it shows nearly $66 billion worth of earnings off the peak which says that there’s a lot of growth left there. In the Financials sector, it shows almost $50 billion off the peak and for the Industrials sector, it shows almost $16 billion off the peak. This shows that there are very large pockets of the US economy that still have a lot of room to grow before they reach their peak in earnings. That doesn’t mean that areas that are currently at their peak such as Healthcare, Materials, and Staples, must fall off. Those sectors can continue to grow as well. There is still a lot of optimism going forward in the US economy.
Inflation and The Fed
Earnings have been great; however, inflation and the Fed are two of the biggest drivers, outside of fundamentals, that could potentially cause harm to the market. Every month, inflation numbers are reported and this month’s report shows inflation at 7.5%, which is the highest in quite some time. What does that mean for us and for the Fed? We’re currently seeing that there is a possibility of six rate hikes coming, which had not been forecasted until this latest reported CPI number of 7.5%. Likely, the Fed is going to take another look at inflation before their March meeting, but now on the table for discussion during that meeting could be a possibility of a 50-basis point rate hike, instead of a 25-basis point hike. What could that mean? This took the market by surprise, so we definitely need to keep an eye on that and hopefully the Fed does not over tighten like they did back in 2018. We saw how the market reacted to a potentially overly hawkish and more aggressive Fed when the market fell off towards the end of last week, based on that fear. There’s a lot of emotion behind that which is why we always like to look at the technical analysis, in addition to the fundamental analysis, because the pure numbers take all the emotion out of it. Adam reports the technicals and re-centers us each week with what the numbers tell us and what the market’s tone is with just pure numbers and not emotion.
Volatility continues to be a theme in 2022, as we saw the S&P 500 close on Friday at a price of 4,418. This gives us a new short-term resistance level of 4,450 and a new support level of 4,390. We currently see the 100-day moving day average of the S&P 500 sitting at a price of 4,574. Topics such as earnings, the Fed, and inflation, are all very important to take into consideration when we’re looking at technical analysis. The numbers mentioned here are good strong numbers and we may see strength on some of those lower support areas or we may see weakness if we end up near some of those ceilings. There’s a lot of data to take in and we hope this information is helpful. What we’re trying to do is build a narrative that really focuses on where we stand in the US with our markets and with our clients and their portfolios.
Trey Booth, CFA®, AIF®
Chief Investment Officer
Email Trey Booth here
Adam Vansant, AIF®, BFA™
Email Adam Vansant here
Associate Vice President
Email Ty Miller here
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
No strategy can ensure success or protect against a loss.
Stock investing involves risk including potential loss of principal.
Securities and advisory services offered through LPL Financial, Member FINRA/SIPC and a registered investment advisor.
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