Brief Market Update

January 24, 2022

The S&P 500 is now down over 10% year-to-date, with the NASDAQ and Russell 1000 Growth down over 15%. We wanted to update you on what we believe to be the primary drivers of the downturn and our thoughts, as the majority of the decline has come since our last communication on January 14.

What has changed since January 14?

  • The main update has been corporate earnings, with more large firms echoing JPMorgan (who reported January 14) and citing rising expenses due to inflation, in particular wages. This has investors worried about corporate profit margins. The bulk of the S&P 500 will report earnings this week or next, so we will get even more updates on this front soon.
  • Some near-term economic growth estimates, such as this morning’s flash US Composite Purchasing Managers’ Index (PMI) have come in weaker than expected due mainly to the Omicron wave and ongoing supply issues/labor shortages.1
  • Expectations for the Federal Reserve to hike interest rates multiple times in 2022 have only strengthened, with Goldman Sachs now calling for more than four rate hikes this year.2
  • The Russia/Ukraine stand-off situation has not improved.

Implications:

The beginning of the year had been characterized by an aggressive rotation from high-price/earnings (P/E) multiple growth stocks into low-P/E value stocks, in particular into lower-quality cyclical stocks that rely on high economic growth/inflation. As this shift occurred, the overall index did not suffer much as investors were selling one group to buy the other. The primary cause of the rotation was high inflation and expectations for the Federal Reserve to raise interest rates, hurting valuation multiples of high P/E growth stocks in particular as more of their earnings are in the future and now need to be discounted back to the present at a higher rate. Financials fall primarily into the value/cyclical stock group and, starting with JPMorgan, the weak earnings guidance of banks due to higher expenses caused a change in investors’ outlooks. Now both groups are being sold, as investors worry about both lower P/E multiples AND a lower “E” (earnings) due to shrinking profit margins.

GGS Thoughts:

None of the news since January 14 is very surprising (higher wages, Omicron causing near-term issues, Fed hiking rates, Russia/Ukraine), as we wrote about all of these in our January 14 outlook. While the news was incrementally more negative on these fronts last week, we think the bigger change has been investor psychology, which was perhaps too optimistic coming into this year and has now shifted in the opposite direction. Our bottom line recommendation remains the same: We continue to recommend clients avoid trying to time the market and stay fully invested to their target risk level in good times and in bad. We continue to be confident that our holdings of high-quality stocks at attractive valuations will earn solid returns for long-term investors.

Galvin, Gaustad & Stein (“GG&S”) is an SEC registered investment adviser located in Scottsdale, Arizona. GG&S and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC registered investment advisers by those states in which GG&S maintains clients. GG&S may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements. GG&S’s web site is limited to the dissemination of general information regarding its investment advisory services to United States residents residing in states where providing such information is not prohibited by applicable law. Accordingly, the publication of GG&S’s web site on the Internet should not be construed by any consumer and/or prospective client as GG&S’s solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet. Furthermore, the information resulting from the use of tools or other information on this Internet site should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from GG&S. Any subsequent, direct communication by GG&S with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of GG&S, please contact the United States Securities and Exchange Commission on their web site at www.adviserinfo.sec.gov. A copy of GG&S’s current written disclosure statement discussing GG&S’s business operations, services, and fees is available from GG&S upon written request. GG&S does not make any representations as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to GG&S’s web site or incorporated herein, and takes no responsibility therefore. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP and CERTIFIED FINANCIAL PLANNER in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

CFA and Chartered Financial Analyst are registered trademarks owned by CFA Institute. GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.

Past performance is no guarantee of future results and may have been impacted by market events and economic conditions that will not prevail in the future. This site/blog contains certain forward‐looking statements (which may be signaled by words such as “believe,” “expect” or “anticipate”)which indicate future possibilities. Due to known and unknown risks, other uncertainties and factors, actual results may differ materially from the expectations portrayed in such forward‐looking statements. As such, there is no guarantee that the views and opinions expressed in this letter will come to pass.

ACCESS TO THIS WEB SITE IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND WITHOUT ANY WARRANTIES, EXPRESSED OR IMPLIED, REGARDING THE ACCURACY, COMPLETENESS, TIMELINESS, OR RESULTS OBTAINED FROM ANY INFORMATION POSTED ON THIS WEB SITE OR ANY THIRD PARTY WEB SITE LINKED TO THIS WEB SITE.

Relationship Summary (ADV Part 3)