Stocks ended lower on Friday, reminding investors of the continued effect the Federal Reserve has on sentiment for risk assets. Investors have cited the Fed’s increased hawkish stance on monetary policy, particularly its decision Wednesday to accelerate the end of quantitative easing and to pencil in three interest-rate increases for next year, as the reason for the selloff. Fed Chairman Jerome Powell also said there was a risk of high inflation persisting.
That said, while the Fed has gotten the bulk of the blame for the recent decline in stocks, there are also other factors at play, including Friday’s CPI, which showed higher-than-expected inflation. Ryan Detrick, chief financial strategist at LPL Financial, suggested despite the high inflation data, some investors might be relieved given that it still came in right about as expected. In other words, the bad news might already be priced in. “These areas have been stubbornly high and this could be one of the first signs that inflation could be nearing a peak,” he added.
Nevertheless, on Friday, as volatility moved higher, all eleven sectors finished lower with all three major averages losing ground on the day and for the week. On Friday, the Dow Jones Industrial Average lost declined 532.20 points, or 1.48% to close at 35,365.44. The blue chip index was punished by, among others, Nike (NKE), Intel (INTC) and Apple (AAPL) and Microsoft (MSFT), offsetting better-than 5% rise in FedEx (FDX) as the company restated its original 2022 fiscal forecast after easing concerns about labor shortages.
The S&P 500 fell 48.03 points, or 1.03%, to close at 4,620.64, while the tech-heavy Nasdaq Composite index declined 10.75 points, or 0.07%, to finish the session at 15,169.68. The Dow suffered a weekly decline of 1.75%, while the S&P 500 index lost 1.9%. The Nasdaq’s slight outperformance on Friday was in part to a decline in the 10-year Treasury note yield which briefly fell to below 1.40%. Investors tend to favor tech stocks when yields drop. However, the Nasdaq Composite was still the week’s biggest decliner with a loss of 3%.
After initially soaring higher following the Fed’s meeting earlier in the week, the market has trended mostly lower. The question is, which direction will stocks take this week? Just as importantly, will the long-awaited “Santa Claus Rally” finally emerge? The Nasdaq, for example, now stands 5.5% beneath its Nov. 19 record closing high, meaning the index has declined more than halfway to 10%, which would put it in correction territory. This buying opportunity is hard to ignore, given the resiliency we have witnessed in the economy and labor data.
What’s more, recent earnings results from the likes of FedEx, which is often regarded as a gauge of global economic activity, suggests improvement in spending and business activity have begun. As such, I continue to believe staying invested in the market is the best way to counter inflation, especially given all of the positive offsetting factors that still exists. And until there are clearer signs of a market pullback, this sentiment won’t change.
As for earnings, here are the stocks I’ll be watching this week.
Micron (MU) - Reports after the close, Monday, Dec. 20
Wall Street expects Micron to earn $2.11 per share on revenue of $7.67 billion. This compares to the year-ago quarter when earnings came to 78 cents per share on revenue of $5.77 billion.
What to watch: Micron stock is up 10% year to date, sharply underperforming not only the broader tech sector, but also the 24% rise in the S&P 500 index. What’s more, the stock is up just 2% over the past six months, trailing the S&P 500’s 10.5% rise. Investors are still unsure about the demand prospects of memory chips, namely NAND and DRAM which are use in various mobile devices such as smartphones, as well as chips to power cloud computing, AI, and 5G. Management on Monday will need to speak positively about business prospects for in 2022 which can boost investor sentiment. However, Citigroup analyst Christopher Danely who has an Outperform rating and $120 price target on the stock, expects demand for DRAM chips to rise in the first quarter of next year. "DRAM spot pricing has started to increase for the first time in six months due to the increased [customer] demand," Danely said, in a research note last week. Given the factors, the analyst sees strong pricing improvements for DRAM throughout 2022 due to "higher demand and lower production.” From current levels of around $83, Micron stock looks like strong value assuming it can reach the $120 level. On Monday Micron must guide in a manner that suggests increased confidence in the prospects of the memory chip business.
Nike (NKE) - Reports after the close, Tuesday, Dec. 21
Wall Street expects Nike to earn 63 cents per share on revenue of $11.25 billion. This compares to the year-ago quarter when earnings came to 78 cents per share on revenue of $11.24 billion.
What to watch: Shares of Nike have fallen 5.5% over the past thirty days, including almost 4% in the past five days. While shares are up 15% year to date, they trail the 24% rise in the S&P 500 index. However, Nike’s relative underperformance doesn’t reflect the operational excellence the company has displayed over the past several quarters. Some of the factors that has pressured the stock include supply chain issues. But that shouldn’t prevent the stock from being bought, according to analyst Beth Reed at Truist. In a recent note to investors, Nike was listed as one of five retail stocks that should emerge stronger coming out of the pandemic. Reed cited the company’s strong margin potential due to its opening profile such as lower inventories which will drive fewer promotions and increase e-commerce adoption. Nike continues to enjoy strong demand for its products across the globe as consumers develop an increased focus on health and wellness as a result of the pandemic. Investors on Thursday will look to see whether the athletic apparel giant can continue to assert itself as one of the better-performing names within the retail sector.
BlackBerry (BB) - Reports before the open, Tuesday, Dec. 21
Wall Street expects BlackBerry to lose 7 cents per share on revenue of $177.25 million. This compares to the year-ago quarter when earnings came to 2 cents per share on revenue of $224 million.
What to watch: Investors have become seemingly frustrated with BlackBerry's lack of execution and management's inability in recent quarters to generate much-needed cash from a patent portfolio sale. With shares down 32% over the past six moths, including a 22% decline in thirty days, the company continues to underperform, particularly with its Enterprise Software Services segment (its largest business), which has struggled for several consecutive quarters, as has its QNX business. In the most recent quarter, Licensing and IP revenues plunged almost 90% year over year. Also disappointing was the $175 million in revenue that rose by a mere $1 million sequentially. These revenue results under CEO John Chen highlights the struggles BlackBerry continues to experience in its transition to become a software and services specialist. BlackBerry is in desperate need of some positive news. But that could come as early as this week, thanks not only to increasing cyber security demand, but also the reviving auto industry, which should boost the QNX business. Investors will want to see improved trends in both areas, along with improved business and operating fundamentals to reverse the stock price decline.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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