The bad start for Stock Market to 2022 just got worse! There was a decline of 1646.44 points, or 4.6%, in the Dow Jones Industrial Average this past week.
Comparatively, the S&P 500 declined 5.7%, and the Nasdaq Composite fell 7.6% and is now down 14% from its all-time high, reached in November. Each had its worst week since 2020.
It’s strange how the drops make sense. The gains made last year were due to a combination of easy monetary policy from the Federal Reserve, generous government handouts, and booming corporate earnings.
According to Refinitiv data, corporate profits are on pace to grow by 24% during the fourth quarter, but dollars are not flowing out of Washington and the Fed is preparing to raise interest rates.
Against that backdrop, it’s not surprising that the Stock Market has declined. Dave Donabedian, chief investment officer at CIBC Private Wealth US, says it’s a logical reaction to the environment.
Although rational, the decline has been painful for investors who have been taught to buy on the dips. Nasdaq Composite rallied by 1% on two consecutive days this week but ended up losing by the end of the day.
The reversal on Thursday was unusual. Only seven times over the past decade has a gain of 1.5% or more turned into a loss of 1% for the Nasdaq 100.
Susquehanna Financial Group analyst Christopher Jacobson notes that the index was higher one week later in five of six cases. According to him, those past moves could provide some solace to those seeking signs of optimism. But the bad news is that the sample size is quite small.
Stock Market Performance
When Nasdaq’s most-flying stocks consistently disappoint investors, it’s hard to be optimistic. Netflix (NFLX) and Peloton Interactive (PTON) provided the biggest shakeups. This past week, Peloton lost 14% of its value after a report that it would stop production in February and March.
In response to lower demand for its bikes and treadmills, Peloton admitted it had to right-size its business. According to Netflix, it expects just 2.5 million new subscribers during the first quarter of 2022, far below forecasts for 5.7 million.
One wonders what to expect from Apple (AAPL) and Tesla (TSLA) coming out next week.
A combination of Fed tightening and big earnings miss led to the dot-com bubble popping in 2000, according to Wolfe Research analyst Chris Seek.
While that isn’t his base case, with the Fed tightening once again and strong expectations for technology spending, a repeat wouldn’t be hard to conjure.
EPS beat for the overall Stock Market and tech companies are expected to be in the mid-to high-single digits, according to Seek. The downside, however, could be considered if we’re wrong.