Bears at the Gate

Markets being closed on Monday led to a shortened trading week that certainly wasn’t any less painful than the one previous, with the S&P 500 falling over 5% in one of the worst weeks in recent months.

Fears of increased geopolitical tension in Ukraine have added fuel to the fire, with stock valuations already under threat from looming interest rate hikes. Biden comments that Putin “Has to do something,” referencing the growing mass of Russian soldiers on Ukraine’s border while simultaneously convincing NATO allies to send more military aid to the Eastern European country, hasn’t filled many with confidence, and markets certainly priced that in last week.

Unlike the US, the UK had another positive week with the FTSE 100 now returning 3% in the first three weeks of the year, mainly off the back of Boris’s announcement that he was lifting all Covid restrictions in the country.

That is undoubtedly a good move for the economy and should be applauded, even if he’s only doing it after taking intense criticism for hosting parties during the lockdown that he had himself imposed.

There is still a lot of pressure for Borris Johnson to resign, and you could be excused for mistaking this all for Netflix’s latest political drama. People don’t take kindly to the hypocrisy of closing schools, limiting family at funerals, etc., while simultaneously flaunting your own rules and partying it up.

In Panama, the big news was that the new agreement signed with First Quantum Minerals should generate over $400m for the country. The Minister of Commerce, Martinez, presented the new contract last week that included higher royalties for the extracted copper and income tax, which they have not been paying up until this point. There would be an exemption if the price of copper were to fall below $2.75 a pound.

It was another pretty rough week for the markets, and the year hasn’t gotten off to a great start. When going through tough times like this, I like to think back to March 2020, when the S&P 500 fell 32% in a single month.

While it felt like the world was ending at the time, it took less than four months for the market to recover fully, and it then went on to end the year up over 18%.

It's important to remember that in periods of increased volatility such as this, the worst action we can take is to sell and then miss out on the bounce. We can also lower our average entry costs by buying the dip and taking advantage of the opportunity presented.

Earnings Season

“Netflix has gone from airing Squid Game to becoming a player in it.” CNBC, after Netflix shares fell over 20% last week.

This obviously has negative connotations for media streaming companies as the economy opens up. In Q4 of last year, the growth of subscribers was undoubtedly less than what many expected.

More than 100 other S&P 500 companies are due to release their Q4 earnings report this coming week which can lead to a lot more volatility, especially for individual companies that will report earnings higher or lower than expected.

With many technology companies, a high level of growth is already priced into their share price, so they can still report substantial levels of growth and see their stock value fall at the same time.

The below graph shows the S&P 500 adding more than 17% during the 2020 calendar year, even though it fell more than 30% in March/April.

• Stocks fell for the third week in a row, with major U.S. indexes posting their sharpest weekly declines since March 2020, early in the pandemic. The NASDAQ dropped nearly 8%, the S&P 500 fell almost 6%, and the Dow gave up nearly 5% as investors worried about everything from rising interest rates to geopolitical conflict in Ukraine.
• The price of Bitcoin dropped more than 10% for the week, with most of the decline coming on Friday, as the cryptocurrency fell below $40,000 for the first time in nearly six months. In early November, Bitcoin traded as high as $67,000.
• Although China’s government estimated its GDP expanded by 8.1% last year, economic momentum slowed in the final two quarters of 2021, when annual growth rates were 4.9% and 4.0%, respectively. The strong figure for the full year was in part the result of a favorable comparison to the economy’s relatively weak growth of just 2.2% in 2020 as COVID-19 initially surged.
• A measure of investors’ expectations of short-term U.S. stock market volatility surged more than 50% for the week, and on Friday it reached the highest level since spiking in early December following the emergence of the Omicron variant of COVID-19.
• Although Wall Street analysts continued to expect that companies in the S&P 500 will report a nearly 22% increase in earnings compared with the prior year’s fourth quarter, some subpar results on Friday from a handful of key companies didn’t provide much of a positive catalyst for stocks. Earnings season enters its busiest period during the trading week that begins on Monday.
• At a policy meeting on Wednesday, U.S. Federal Reserve Board members could give further indications as to how many interest-rate increases they expect to make this year to help control high inflation. The next morning, the government is scheduled to release an initial estimate of the nation’s GDP growth rate in the recently completed fourth quarter.

I hope everyone has a fantastic week, please reach out to me if you would like to discuss anything in more detail.

Luke.