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Markets were poised to end the week higher, despite hotter-than-expected inflation on Thursday.
Michael Nagle/Bloomberg
It was like a splash of cold water in the face, but there is reason to be optimistic about the stock market in the weeks and months ahead.
The market was rising last week, shaking inflation and rate hike fears and the specter of Omicron. At the height of Friday, the
S&P500
was up 5% from its January 27 low, when Federal Reserve Chairman Jerome Powell spoke up and spooked investors. And then came a double whammy on Friday afternoon: Russia and vaccines.
The S&P 500 fell 1.9% on Friday, closing at 4,419, leaving it down 1.8% for the week. Most of this decline occurred in the last two hours and 35 minutes of trading. the
Dow Jones Industrial Average
lost more than 500 points, or 1.4%, on Friday, closing down 1% for the week. And the
Nasdaq Compound
fell 2.8% on Friday, ending the week down 2.2%.
Investors can’t blame rising prices for Friday’s plunge. Markets were poised to end the week higher, despite hotter-than-expected inflation on Thursday. s
Escalating geopolitical tensions were the first issue on Friday. The United Kingdom and the United States have suggested that Russia may soon invade Ukraine and have advised their citizens to leave the country.
Geopolitical tension is not good, but it should not cause permanent damage to the stock market. The top-to-trough movement of the S&P 500 when Russia annexed Crimea in 2014 was about 2%, but the S&P 500 was up 11% for all of 2014. Still, the news blew a wave of uncertainty in the market. And investors really hate uncertainty.
A Covid issue was the second problem. The Food and Drug Administration said it would delay the meeting to approve Covid vaccines for children under 5. This might seem like a minor setback, with Omicron infections dropping. But it could be bigger than even Russia. Any phrase that involves the words FDA, more time, delay, vaccines and children will shake confidence.
The group most in need of vaccines are working families with young children. Low-income people are also more susceptible to Covid disruptions. According to Fed data, families, especially mothers, with young children are leaving the workforce faster than families without children. A return to normal was supposed to ease some labor market tensions and boost incomes. Vaccination delays only delay this process.
In this context, you have the specter of the Fed, which is likely to raise interest rates repeatedly to combat rising prices. Inflation, Russia, vaccines: that’s all the bad news. The question for investors now is: should they buy yet another dip? The answer is probably yes.
The market discounts things before they actually happen, says David Donabedian, Chief Investment Officer, CIBC Private Wealth Management.
He felt optimistic about the market as demand held up. On Friday, Donabedian thought investors had “increased confidence that economic growth is going to be good and…earnings growth is going to be solid.”
RBC head of equity strategy Lori Calvasina found the same thing when reviewing fourth-quarter earnings reports and conference call transcripts. “Consumer demand is still very, very strong,” she says. And that supports 2022 earnings estimates for companies.
As long as earnings remain stable, buying the dip is a winning strategy.
Write to Al Root at allen.root@dowjones.com
