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Market Commentary
Quoted from an article on the Schwab Market Commentary page. A summary of the key points of the article appears below. Schwab updates their market commentary page frequently, so this may not be the most recent. The following comes from their article entitled "No Quarter (For Consistency)".
There is no shortage of headwinds facing both the market and the economy: the tragic Russian invasion of Ukraine and attendant commodity/energy crisis; the Federal Reserve’s transition from accommodative to tighter monetary policy; and increased chatter of a recession on the horizon; among others. Yet, over the past month, stocks have rallied sharply, coming close to erasing their year-to-date losses.
Whether this proves to be a rally in the midst of a bear market, or the end of a corrective phase and start of a leg higher, remains to be seen. Regardless, attempting to guess the short-term moves of the market is always treacherous; so, let’s stick with what we know and assess the health of the rally.
There is a lot of information here and in the original article. To reduce scrolling the major topics have been collapsed into the subtitled sections below. Click or tap on the section title to expand the section. Once expanded, click or tap on the title again, or use the link at the bottom of the text, to collapse the section back to the title block. If you would like to print this page, be sure to expand the sections that you want to be included in the printout.
Taking stock ▾
From their own respective troughs, the major indexes have experienced sharp gains:
- S&P 500 (since its trough on March 8th) has gained 9%
- NASDAQ (since its trough on March 14th) has gained 13%
- Russell 2000 (since its trough on January 27th) has gained 8%.
Those moves are impressive when considering—on a year-to-date basis—all three indexes have undergone a traditional correction (a decline of at least 10%), and the NASDAQ and Russell 2000 did experience traditional bear markets (a decline of at least 20% from a high), as shown in the table below. Individual member performance within those benchmarks has been worse, with the average member’s maximum drawdown from year-to-date highs ranging from -19% to -29%, and from 52-week highs ranging from -25% to -46%.
As we often highlight, investor sentiment — a contrarian indicator at extremes — can help establish both short-term troughs and peaks for the stock market. Shown below is the percentage of bearish respondents to the weekly American Association of Individual Investors (AAII) survey of its members. Bearishness hit a relative low of less than 25% last November and had only lifted to 30% as 2022 began. That may have served as a contrarian indicator for stocks, which began to fall under the weight of monetary policy and geopolitical uncertainty. By the time Russia invaded Ukraine on February 24th, bearishness had surged to nearly 55%, perhaps serving as a contrarian indicator for stocks in the other direction. The move back down to 27% suggests most of the recent pessimism has retreated and could be a setup for more weakness.
In search of quality and quantity ▾
Similar to what we saw after the pandemic trough on March 23rd, 2020, some of the largest tech- and tech-related members in the S&P 500 by market cap — dubbed the “super 7” and shown in the chart below — have helped propel the index’s rebound. It remains debatable whether their current out-sized contributions are healthy. There was a stronger justification in March 2020, given the economy was shut down and we were living almost solely in the spheres represented by these companies. The differences today are stark, though, given a broader reopening has been underway for the better part of a year and the worst of the pandemic is hopefully behind us.
Major topics discussed in this section, with several charts:
- Supersized rebound
- All aboard the rebound
- Spec has driven the rally
- No Earnings Per Share? No problem (for now)
- Cyclical industries lagging
- Asset classes ranked by month
- Sectors ranked by month
In sum ▾
Stocks have had two back-to-back downturns this year, followed by a relief rally. Leadership has flip-flopped, as has investor sentiment. Fed tightening and the war in Ukraine have been the dominant macro forces. The correction earlier this year was largely about higher inflation and rate hikes. More recently, the inversion in the yield spread between 10-year and 2-year Treasuries has heightened recession risk. However, it doesn’t appear as if the stock market has appropriately priced in likely weaker economic growth to come—or the likely weaker accompanying earnings growth.
Trying to trade around these short-term swings has been difficult, and we recommend a relatively neutral stance—while using the diversification associated with strategic allocations, and periodic rebalancing to navigate the volatility. For stock pickers, we continue to recommend a factor-based approach vs. either a sector-based or style index-based approach. We believe factors such as strong free cash flow, low volatility, and rising earnings revisions will ultimately lead throughout this period of likely heightened volatility.
