Telemus Weekly Market Review January 31st - February 4th, 2022
Equity market volatility remains elevated with stocks rising this week as the S&P 500 posted a gain of 1.6%. The NASDAQ Composite came in even stronger adding +2.4%. Markets experienced some earnings-related pain, with a few select technology companies standing out as notable disappointments.
We’ve been talking about 2022 being a year where the economy is going to need to stand on its own two feet as the punchbowls of fiscal and monetary stimulus are being pulled away. At the corporate level this must occur as well, as we are returning back to normalized conditions and there is inevitably going to be greater dispersion in outcomes as there is no longer a rising tide (of stimulus) lifting all boats.
Early in the pandemic many companies stopped providing guidance as it became too hard to forecast business conditions. That flowed into 2021 as the economic rebound was equally challenging to predict. We are now at a point where business conditions are returning to normal. Markets have become more conditioned to consistent results, where if anything the inconsistencies were to the positive.
As we look at the results that have been reported thus far for the fourth quarter of 2021, by and large, they remain strong with 80% of companies having met or exceeded expectations. This level has decelerated slightly from recent quarters, although it remains slightly ahead of historic norms. We have, however, seen the magnitude of earnings beats come down considerably. Moreover, when companies are missing expectations their stock prices are being punished. This is most emblematic among higher priced growth stocks, where suboptimal results are being met with outsized downdrafts as the next group of buyers is requiring a much greater discount in price.
This past week PayPal and Facebook stood out as recent technology favorites that are seeing cracks in business conditions. PayPal is experiencing a slowing in its payments volume, resulting in its shares falling nearly 25% after it reported. Alternatively, Facebook has seen a deceleration in advertising spending, which led to 26% drop. Facebook’s woes looked to be more company specific after competitor Snap, Inc. reported much strong conditions the following day. These issues don’t appear to emblematic of broader macro concerns, but rather company specific outcomes.
To some these harsh reactions to earnings misses appears a bit out of line. However, they aren’t uncommon for meaningful changes in business conditions. We expect to see a wider divergence in corporate conditions as the benefits of stimulus fade and companies go back to issuing guidance. This will have the effect on creating greater dispersion across stock returns, an outcome we would expect to present opportunities for those engaged in active security selection. We’ve seen this type of outcome occur before, both coming out of the tech bubble and the great financial crisis.
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Matt joined the Telemus team in 2018. As Chief Investment Officer, he leads the firms the investment process and research effort. Matt has experience as an equity analyst and portfolio manager and has advised corporate pension plans on their manager selection. He’s been quoted in Money Magazine and Barron’s.