From the view at 30,000 feet, the recent volatility and pullback are all part of the regular ebb and flow that occurs in the stock market. Yes, we just witnessed a pullback greater than 5%, and it was the first such decline since the COVID lows in 2020. Fear showed up and the pullback morphed into a dip into correction territory for the major indices. For some areas of the market, this re-rating of the stock market has for the time being broken the BULLISH trend. There are plenty of individual stock charts that are now in a BEARISH configuration. The real problem for BULLISH investors is the fact that most of this has occurred in about a month. Many have already forgotten that the S&P 500 posted a new high on January 3rd.
The markets are in search of direction. How long this situation lasts and if weakness will spread to other areas of the market remains to be seen. As if investors didn't have enough to keep a watchful eye on, 2022 brings yet another issue for investors. The midterm elections. History shows that it matters little what occurs during the process, it is the rhetoric, angst, and headlines that cause more stress.
Ryan Detrick, Senior Market Strategist notes:
"Midterm years tend to be a banana peel for markets, as they see the largest pullbacks out of the four-year presidential cycle. However, those who hang on for the ride tend to see a significant bounce over the next year."
Investors may remember that 2018 was a challenging year in that the S&P was very weak in the early part of the year. The index was negative for the year until May. It wasn't until July that the markets gained traction and finished higher.
It's always challenging to say "This time is different" but we do have to acknowledge that the backdrop is far different today than what we were dealing with in 2018. For one thing, the market was looking ahead to the positive effects the corporate tax cuts would have on corporate earnings.
In addition, some of the issues investors have to navigate today haven't been part of the investment scene for quite some time. I'll add that this time around it may matter what party is in control of Congress after the election. Historical market returns show some of the best returns come with a Democratic president presiding over a Republican Congress. Given the present backdrop, one has to wonder if it will matter. Then again that spells gridlock and no matter what party has control of what, gridlock is good.
When the Fed starts raising rates it won't fix the Supply chain and Labor shortage issues. There are roughly 60 unemployed people for every 100 job openings. The Fed can't solve the high cost of Energy. There aren't any proposed "fixes" on the table and therein lies the dilemma for not only the Fed but the markets and the economy. No matter what develops on the political scene, I have to go back to the other issues as being the catalyst to warrant at least saying:
"This time sure looks like it could be different"
The Week On Wall Street
A relatively quiet session that kept the S&P 500 in a fairly narrow trading range. A day where investors witnessed how the "technicals" and resistance levels are in control. The morning session saw the S&P 500 rally right to overhead resistance before retreating. Another rally attempt was made in late afternoon trading, and once again the index was turned back at the same level. The index closed down 0.37% in what turned out to be a mixed session.
A two-day rally in ALL of the major indices put near-term resistance in the rearview mirror. A broad rally where the S&P gained 2.3%, while the Russell small caps ran its winning streak to 4 days gaining 4.7% in this span. The much anticipated January CPI Report on Thursday provided the expected knee-jerk reaction. Unfortunately, it was hotter than expected and the indices all opened lower. From there it was a tug of war with the BEARS gaining control as all of the indices gave back their gains for the week.
The BEARS were celebrating like it was 1999 as reports came in that Russia was about to invade Ukraine in a matter of days. Coincidentally that came in around 2 PM with the S&P at a critical support level. This is probably the most advertised invasion in history. No matter, it was SELL now and ask questions later. From the close on Wednesday, the S&P lost 169 points when the closing bell rang on Friday. The index is now down about ~7% on the year.
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