Bear with me this week, this letter will be more detailed and analytical in nature than the usual, but sometimes, it just has to be! Weakness across our financial markets continued for a third straight week with the tech heavy NASDAQ Index leading the way lower. The NASDAQ composite has now moved into correction territory, down over 10%, from its recent November record high levels. What has been of particular interest to me is that on several days this week (Wednesday, Thursday, and Friday) the markets started off in a positive manner only to be sold off in the last few hours or so of trading. This is something we have not seen in some time and leads me to suspect that much of it is “technical” in nature and not based on fundamentals. In other words, we might be seeing more electronic trading based on signals in the market and considered artificial in nature rather than being driven by natural, demand driven selling pressure. Like many industries, artificial intelligence and algorithms play a large role in our U.S. and global markets alike. Like it or not, it has become a part of our financial landscape. Another metric we monitor regularly and have discussed in these letters is the VIX or volatility index. That measure has jumped significantly to 28.85, up +48% YTD (normal range is 13-19). Metrics like this are indicators used by algorithmic trading entities and can certainly enhance the direction and momentum of the markets.
We have been accustomed to seeing market weakness met with buying and support over the past 6 months or so. I suspect that now is the time to be more cautious until further clarity ensues. The Federal Reserve will be coming out of their quiet period and will meet next Tuesday and Wednesday. As we know, the economic landscape has changed significantly and the time for the Fed to act is upon us. The corporate earnings reported this week have been as advertised in my opinion. Generally, they have been in line or better than expected but it is always the forward-looking guidance that drives the near-term performance. As expected, challenges lie ahead, and growth rates are slowing. This is especially evident in some of the higher-flying technology, WFH (work from home) and software services companies like Netflix, Zoom and Peloton to name a few. We have been expecting to see this trend take shape and to hear it outright should not come as a surprise. We are simply moving into a different stage of this current market cycle. Like change in general, things will need to adjust.
On a slightly more positive note, the Omicron levels have appeared to peak in parts of the Northeast this week, a sign that is welcome by all of us. While the numbers in the South are still ticking higher, it does seem that as quickly as it has come upon us, it is fading nearly as fast. We have been hearing the saying, “we will have to learn with it” and I believe, unfortunately, that this is our new reality. We have had a lot to digest this week and my stomach is certainly full right now!
Americans are getting stronger. Twenty years ago, it took two people to carry ten dollars’ worth of groceries. Today, a five-year-old can do it! – Henry Youngman.
Have a nice weekend!