We were more confident at the beginning of last week than market sentiment turned out. The S&P 500 was down 5.68% as traders worried about inflation, the Fed and the effects of Omicron. In turn, plenty of stocks on Wall Street felt the effects.
Traders have a series of somewhat arbitrary benchmarks that qualify as a correction or a bear market. A decline of 7% or more off the prior highs qualifies as a correction, which is now where the S&P 500, Nasdaq Composite and Dow Jones Industrial Average sit when compared to December’s highs.
We still expect this to be a temporary dip that will turn around in the short term. At the risk of sounding like a broken record, earnings growth rates are still positive, making a deeper drop very unlikely.
This week’s major events stand a good chance to create the bounce we expect.
The most important of these is the Federal Reserve’s announcement on Wednesday. This is a routine interest-rate announcement, but we expect the chairman of the Federal Reserve, Jerome Powell, to use the press conference to soothe the market.
Right now, traders are expecting the Fed to be aggressive about raising interest rates in 2022, which deserves a lot of the blame for the recent declines in stocks. To improve sentiment, Powell wouldn’t have to do much more than remind investors that the Fed can postpone rate hikes if economic conditions warrant a more patient approach.
We think an outcome like that on Wednesday is very likely.
Apple and Microsoft
MSFT stock and AAPL stock comprise 13% of the S&P 500 and 20% of the Nasdaq Composite, so the reaction to these giants is critical.
The Microsoft and Apple reports are very likely to beat expectations (as usual), but what we are most interested in is what investors call the “outlook” or “guidance;” when a company reports earnings, they usually hold a conference call and issue a press release that includes internal estimates for how they think the company will perform over the next few quarters. This is called “guidance.”
The most serious issue that stocks have been struggling with so far this earnings season is that guidance from companies that have reported has been underwhelming. This is common, and it usually leads to a short-term drop in stock prices.
However, if Microsoft and Apple report better-than-expected guidance, then tech stocks could have a sizeable rally in store.
What You Should Do
We made a few recommendations last week, including energy stocks and financials, and we still stand behind them. (Click here to learn how to access these plays.) Last week, the weakness we saw in those sectors was market-related, not an issue with value.
We also recommend you take another look at MSFT stock on Wednesday morning.
If Microsoft’s report is good and the stock starts to rise, we like prices under $320 per share. MSFT stock is rarely positioned at a value like it is now and will be the best dip-buying opportunity this month. Tech stocks are susceptible to fears of rising interest rates, so Wednesday’s announcement from the Fed should help calm traders down, and we expect it to increase the potential for MSFT stock to rise.
We are optimistic, but sellers were extremely motivated last week. Besides picking up MSFT stock on positive earnings news, this is one of those weeks that investors should probably let develop a little before going all in. We must be clear-eyed about the risk that the Fed fails to help improve investor sentiment. If that is the case, we may have another week or two of volatility before prices settle down.
Two big tech giants are reporting earnings this Tuesday and Thursday afternoon. Each one has the potential to send buyers back into the market to bring stocks up off their lows.
In between these two reports, the Fed is also making an interest rate announcement on Wednesday. Historically, when the market is falling like this, the Fed uses its press conference to settle traders down a little, so business investment can stabilize.
John Jagerson & Wade Hansen
Editors, Trading Opportunites