Key Takeaways
- Small Caps Enter Correction, With Major Indices Also Posting Weekly Losses
- Oil And Natural Gas Prices Surge, Adding To Inflationary Pressures
- Earnings Season Begins Amid Elevated Valuations And Economic Uncertainty
Major indices were down across the board last week. The S&P 500 and Nasdaq Composite each lost 2%. The Dow Jones Industrial Average fell 1%. But the biggest loser for the week were small cap stocks with the Russell 2000 dropping 3%. The Russell is now down 11% from its highs, putting it in correction territory. Meantime, the S&P and Nasdaq are down around 7% from their respective highs.
If it sounds like I’m beating a dead horse when I talk about bond yields, it’s because I’m not sure the horse is dead. Yields on the 10-year note are 4.78%, roughly in line with where they were when I penned Friday’s column. The yield on 30-year bonds is sitting around 4.95%, down slightly from Friday morning. These levels continue suggesting longer-term concerns about the economy and inflation. Speaking of which, last week oil prices jumped 3.5% and in premarket trading, crude is higher by more than 1.5% at over $78 per barrel. That is a five-month high and closing in on $80, a psychologically important number. At the same time we’re seeing oil prices spike, natural gas is also moving considerably higher. In premarket trading, natural gas futures are higher by 1%.
This week will bring some more clarity on inflation with a lot of economic data scheduled for release. Tomorrow, the Producer Price Index (PPI) is due out. Then on Wednesday, the Consumer Price Index (CPI) will come out. I’ll be watching these two reports very closely, especially in light of a report last Friday where consumer expectations for inflation came in higher than expected. We’ll see if those expectations match up with actual data when it’s released this week.
In addition to the economic data being released, this week is the kickoff for earnings season with major banks reporting. We’ll hear from Citigroup, Goldman Sachs, JP Morgan and Wells Fargo before the open on Wednesday. Then on Thursday, Bank of America, Morgan Stanley and United Health Group all report.
The heart of earnings season is still a couple weeks away, but expectations are for a strong quarter. According to FactSet, fourth quarter earnings are forecast to have grown 11.7% year-over-year. That would be the highest rate of growth since the fourth quarter of 2021. However, it’s worth noting that 2021 was a bit of an economic anomaly as the country was just emerging from the Covid pandemic.
It’s worth noting, the 12-month forward-looking P/E ratio for the S&P 500 is currently 21.5. That is comfortably above its historical average and will require strong quarterly results for stocks to hold their current levels. Put differently, if earnings come in weaker than forecast or should forward-looking statements give any hint of a slowdown, we could see equity prices come under pressure. Case in point, shares of Apple are indicated lower over 1% in premarket after it was reported the company sold 5% fewer iPhones in the last quarter and lost 1% if its market share in 2024.
For today, I’m continuing to monitor bond yields and oil prices. I’m also closely watching market volatility. The VIX is over 21 in premarket activity and some of the other, more esoteric, measures of volatility are significantly elevated. Lastly, I’m monitoring the crypto market where bitcoin prices have fallen significantly from recent highs. In premarket, bitcoin is trading around $91 thousand, well off its 52-week high of nearly $108 thousand. As always, I would stick with your investing plans and long-term objectives.
tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.