Wall Street Breakfast: What Moved Markets

- Stocks ended on a high note Friday with a furious late rally to wrap up a roller-coaster week, as a strong earnings report from Apple helped technology stocks rebound from the beating they had suffered so far this year. The S&P 500 added 2.4% for its best session since June 2020, the Dow Jones average swung from an early 350-point loss to end with a 565-point gain, and the Nasdaq Composite surged 3.3% but still remains on track for its worst month since the 2008 financial crisis. This week's wind swings indicate the challenge the market now faces, which is that financial conditions are going to be tightening, and Wall Street is ramping up expectations of how many times the Federal Reserve will raise rates this year -- five looks like the new consensus. For the week, the S&P and Dow rose roughly 1% while the Nasdaq ended flat, offering no hint of the volatility that happened along the way.

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Top News Shutterstock Stocks ended on a high note Friday with a furious late rally to wrap up a roller-coaster week, as a strong earnings report from Apple helped technology stocks rebound from the beating they had suffered so far this year. The S&P 500 added 2.4% for its best session since June 2020, the Dow Jones average swung from an early 350-point loss to end with a 565-point gain, and the Nasdaq Composite surged 3.3% but still remains on track for its worst month since the 2008 financial crisis. This week's wind swings indicate the challenge the market now faces, which is that financial conditions are going to be tightening, and Wall Street is ramping up expectations of how many times the Federal Reserve will raise rates this year -- five looks like the new consensus. For the week, the S&P and Dow rose roughly 1% while the Nasdaq ended flat, offering no hint of the volatility that happened along the way.       Energy Russian roulette The warnings over Ukraine are coming in fast and loud, as the EU and U.K., with support from the U.S, draw up plans to sanction Russia's energy sector if Moscow invades the country. The group would cut off new gas projects from Western financing and technology, which could hamper Moscow's ability to drive new production in the future. Russia is likely to unveil counter-sanctions, in a similar process that occurred following its annexation of the Crimean peninsula in 2014. Would it backfire? The 27 nations of the EU buy about 40% of their natural gas from Russia, so it is looking elsewhere for a vast supply. Diplomats have even been speeding up negotiations for fallback sources with gas producers around the globe, like Azerbaijan and Qatar. The Biden administration has also held a marathon of video calls in recent days trying to convince buyers in South Korea, Japan and elsewhere - that have already paid for their imports - to let the U.S. reroute the shipments to Europe. "Politically, we are very keen to help both the United States and Europe, but in reality we cannot just walk away from our long-term commitments to Asia even if it is just for a short period," a senior Qatari adviser told the WSJ. "The U.S. and other players in Europe will have to do a lot of convincing here." Go deeper: U.S. LNG exporters, which are already running near capacity, have told officials that they are sending as many shipments as they can to Europe without violating other customers' long-term supply agreements. In fact, Europe is taking 70% of America's LNG cargoes, according to S&P Global Platts. There are also some near-term bottlenecks that have to be ironed out, including a limited number of U.S. export terminals that can turn gas into a liquid so it can be shipped over long distances.       Featured Get to know 'inverse bubble' stocks While growth stocks sputter, a select group of stocks is looking very compelling. Louis Stevens and the team at Beating the Market believe the best is yet to come for a small group of companies forming what he calls 'inverse bubbles'. These stocks are set to disrupt a host of key industries, handing them the chance of seeing significant gains over the next few years. Check out this free webinar to hear Louis discuss his research and present two stocks worth putting on your watchlist right away. Watch now » On The Move Earnings pour in Microsoft: It's not an easy environment to report earnings, given the recent market volatility, but Microsoft (MSFT) was able to overcome the recent selling pressure on the tech industry. Shares rose 1.2% AH to $292 on Tuesday (following an earlier decline) as the company delivered an upbeat forecast for fiscal third quarter. Don't forget beats on both earnings and revenue, with quarterly sales that topped $50B for the first time on strength in cloud, gaming and Windows software. Tesla: Despite earnings smasher in AH trading on Wednesday, Tesla (TSLA) shares drifted lower (and then plunged) on supply chain developments that got some investors nervous. Its factories have been running below capacity for several quarters due to low quantities of semiconductors and related parts, and that headwind is expected to persist throughout 2022. "The chip shortage, while better than last year, is still an issue," CEO Elon Musk said on a conference call with analysts. Apple: On Thursday, the world's most valuable company posted the highest revenue in its history. Apple's (AAPL) sales during the holiday quarter climbed 11% to $123.9B, led by strength in the iPhone, which generated $71.6B of revenue over the three-month period. Earnings also topped $30B for the first time, and shares responded by soaring 5% AH to $167, a notable price movement that came amid the recent upheaval in the technology sector. Robinhood: The latest results from popular retail trading app failed to impress investors, with the stock plunging to under $10 on Friday, following a 6% fall during the previous session. Robinhood (NASDAQ:HOOD) posted weak revenue guidance, as well as big earnings and revenue misses in Q4, as the retail trading frenzy in meme stocks and crypto lost steam. That's prompting the industry pioneer, which brought commission-free trading to the masses (via payment-for-order-flow), to look for new revenue streams.       Central Banking Powell presser If you thought the press conference of Jay Powell would provide some clarity for the markets... guess again. Stocks initially rallied Wednesday, but ended the day lower, and futures sold off heavily that night, only to pare much of their losses. Meanwhile, the yield curve shrank to the flattest since 2020 following the FOMC meeting, with two-year Treasuries extending declines even as 10-year notes rebounded. Quote: "This is going to be a year in which we move steadily away from the very highly accommodative monetary policy that we put in place to deal with the economic effects of the pandemic," Powell declared. "I would say that the committee is of a mind to raise the federal funds rate at the March meeting, assuming conditions are appropriate for doing so. I don't think it's possible to say exactly how this is going to go, and we're going to need to be, as I've mentioned, nimble about this so that we can respond to the full range of plausible outcomes." The hawkish pivot, coupled with uncertainty, comes as red-hot inflation plagues the economy with an annual rate of 7% seen in December. The central bank also approved one final round of asset purchases, bringing an end to its pandemic-era bond-buying in March. There will be additional discussions about reducing the Fed's nearly $9T balance sheet, which will be "led by the incoming data and evolving outlook."

What's in the cards? Following the press conference, futures betting markets showed an 86% chance of a 25 basis point hike for the March FOMC meeting, while 14% predicted a 50 bps increase (a half-point hike hasn't occurred since May 2000). "Powell said that the Fed's focus has always been on the underlying economy, and a byproduct of that has been inflated asset prices," noted Max Gokhman, chief investment officer at AlphaTrAI. "But now that inflation is here and real while labor markets have slack, it's time to focus on fighting that fire, and if that burns euphoric bulls then so be it."

     

Cryptocurrency

RIP Diem

Facebook's (FB) grand plan to bring cryptocurrency, or more specifically stablecoins, to the social network's billions of users has reportedly gone up in smoke. The idea was to have money spent, transferred and paid across its platform just "as easily as sending a text message" and could even bring financial services to many of the world's underbanked citizens. While the company initially hoped to peg the asset to a basket of currencies, which used distributed ledger technology, it eventually narrowed its focus to one-for-one to the dollar to reduce volatility.

Backdrop: Facebook founded the Libra project, now known as the Diem Association, back in 2019, though the initiative immediately struggled to get off the ground. As regulatory scrutiny picked up across the globe, many founding members pulled out of the endeavor including PayPal (PYPL), eBay (EBAY), Stripe, Visa (V) and Mastercard (MA). Policymakers cited existing privacy concerns about how Facebook handles user information, and they saw the potential for the new scheme to enable crime, money laundering and erode their control over the monetary system.

Last October, Facebook (should we be saying Meta?) finally launched a "small pilot" to test its crypto wallet Novi, but without its planned cryptocurrency called Diem (it used a different stablecoin called the Pax Dollar instead). Criticism from lawmakers immediately erupted, while David Marcus, the founder of Diem, subsequently left the company. The project also attempted to shift its operations from Switzerland to the U.S. - with crypto-focused bank Silvergate Capital becoming the exclusive issuer of Diem - though the Federal Reserve "dealt the effort a final blow."

Outlook: Meta currently owns about a third of the Diem venture, with the rest retained by venture capital firms and tech players that are members of the association. While discussions are still in the early stages, Bloomberg reports that Diem's intellectual property might be sold to in order to return capital to its investor members. The association is also looking out for a new employer that could take on the "engineers who developed the technology, and cash out the value left in the project."

     

Stocks

Portfolio protection

Stock investing since the global financial crisis has been heavily rooted in TINA, an acronym that stands for "there is no alternative." That has helped drive many of the explosive valuations we see today, however, the prospect of higher interest rates is starting to weigh on the sentiment. TINA has also created subcultures of its own, like the retail crowd, and the somewhat rebranded moniker "Stonks Only Go Up."

Keep in mind: In any market environment, especially the current volatile one, it is important to have some portfolio protection. That includes diversification, having cash on the side, or staying in your long-term positions and not getting too emotional. Investors that do want to dip into pockets of the markets are generally advised to do so in smaller amounts as the trading landscape becomes clearer.

"We're in what I call the triple threat of... rapidly rising rates, and the market has been working overtime, as have all of the algorithms, to try to figure out what that means, and what that pace means for valuations and global equities," explained UBS Private Wealth Management's Alli McCartney. "For the last decade, the market has been able to count on the Fed to support growth. It is now swinging the pendulum and having very different acts to take care of, while the market is figuring out what that means for valuations."

Snapshot: For those looking to put money to work, many analysts have said it is (or was) time to get defensive, or rotate out of high-growth areas of the market in favor of safer bets. Others are searching for yields, like stable dividend payers, or even revenue producing tech players. Commodities, utilities, consumer staples and REITs are other sectors attracting attention, while some feel that "buying the dip" could be profitable in any number of beaten down sectors. Other strategies? Discuss in the comments section below.

     

U.S. Indices
Dow +1.3% to 34,725. S&P 500 +0.8% to 4,432. Nasdaq +0.% to 13,771. Russell 2000 -1.6% to 1,956. CBOE Volatility Index -4.1% to 27.66.

S&P 500 Sectors
Consumer Staples -1.6%. Utilities -2.5%. Financials +0.1%. Telecom -2.3%. Healthcare -1.3%. Industrials -2.1%. Information Technology -2.%. Materials -1.5%. Energy +5.7%. Consumer Discretionary -3.2%.

World Indices
London -0.4% to 7,466. France -1.5% to 6,966. Germany -1.8% to 15,319. Japan -2.9% to 26,717. China -4.6% to 3,361. Hong Kong -5.7% to 23,550. India -3.1% to 57,200.

Commodities and Bonds
Crude Oil WTI +2.6% to $87.31/bbl. Gold -2.3% to $1,790.1/oz. Natural Gas +16.7% to 4.667. Ten-Year Bond Yield -3. bps to 1.778.

Forex and Cryptos
EUR/USD -1.68%. USD/JPY +1.35%. GBP/USD -1.08%. Bitcoin +3.3%. Litecoin -5.5%. Ethereum -2.1%. XRP -4.6%.

Top S&P 500 Gainers
Corning (NYSE:GLW) +20%. Halliburton (NYSE:HAL) +14%. The Gap (NYSE:GPS) +12%. Seagate Technology Holdings (NASDAQ:STX) +12%. Coterra Energy (NYSE:CTRA) +12%.

Top S&P 500 Losers
Teradyne (NASDAQ:TER) -22%. Western Digital (NASDAQ:WDC) -14%. NextEra Energy (NYSE:NEE) -12%. Freeport-McMoRan (NYSE:FCX) -12%. Advanced Micro Devices (NASDAQ:AMD) -11%.

Where will the markets be headed next week? Current trends and ideas? Add your thoughts to the comments section.

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