The Signal: Right on Target

The Market Signal

What’s driving volatility?

You could call it the “everything rally.” 

The chairman of the Federal Reserve, Jerome Powell, threaded the needle of market expectations Wednesday in pledging support for a small hike in interest rates (25 bps), but stopping short of throwing fuel on expectations for a more aggressive path. This matched the market bias, which, over the past couple days, began to rule out a 50 bps hike on March 16. Probabilities had risen, albeit slightly, of no hike at all. 

If you’ve been following this commentary, you’ll note that a key part of the valuation case for risk assets centers around where interest rates are and will be. In simple terms, as rates rise, risk assets like growth stocks (and to some extent crypto) may struggle. 

That dynamic played out this week as the market got a lift Wednesday and Thursday – along with many cryptocurrencies, despite the rising interest rate path. Just under half of the top 100 most valuable cryptocurrencies rose. 

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A key dynamic was recent momentum: most that were higher had notched 30-day gains, and many of those lower were in the red over the past month. Despite the near 50-50 split Wednesday, cryptocurrencies pushed back above $2 trillion in collective market value for the first time since early February. Thursday was devoid of much action, with not a single double-digit daily gain or loss among the top 100. 

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The Data Signal

Where's the energy then?

In energy of course. It is the top performing sector on a 1-week, 1-month, 3-month, half-year and 1 year basis, adding 40% to its collective value in that span.  Still, the aggregate market value of publicly traded companies in the sector sits near ~$3.3 trillion – approximately the combined value of Apple and Meta Platforms (even after the social network’s selloff and subsequent stabilization). Looking at just those energy stocks listed in the S&P 500, it’s even smaller, at $1.36 trillion, slightly smaller than Amazon. Top energy stocks over the last year include Devon Energy and Marathon Oil. 

Why is it relevant?

The energy sector used to be a larger slice of the economy. And it could be going forward, though at the expense of other areas. “Persistent high energy prices are a clear obstacle for economic growth,” Andrew Pesco, head of investment strategy at Domain Money Advisors, LLC* said, adding that the longer they remain elevated, the more likely they’ll negatively impact economic growth and stock prices. 

As for specifics? S&P 500 returns have averaged -3.4% in the year following instances in which energy prices have risen as dramatically as we’ve seen over the last few months,  Bloomberg Intelligence’s Gina Martin Adams remarked recently. Oil price rises can often be a root cause for recessions, she added. 

Pass it on

As for the pass through of higher prices (energy and supply chain issues) to the economy, the Fed and corporations are on watch. Of note are retailers this week. Abercrombie and Fitch cited cost inflation for its lower margin outlook, and sold off with earnings to the tune of 16%. Dollar Tree also struggled with their results and outlook.

But it was those with pricing power, like Ross Stores, Nordstrom and Target that shined. Target added an American Airlines worth of market value (~$12B) following its results. Indications from Signal** are that social sentiment and Wall Street are broadly aligned on the Bullseye retailer.

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* Domain Money Advisors, LLC, an investment advisor registered with the U.S. Securities and Exchange Commission and an affiliate of Domain Money, is currently recommending the following assets contained in this edition of Domain Money’s The Signal as part of Managed Strategies: FB, AAPL, AMZN. 

** These measurements were generated by Domain Money Social Sentiment Signal on 3/3/2022 and they fluctuate continuously in response to the various contributing data points and trends. Domain Money Signals are tools that aggregate information related to market sentiment and should not be relied on for investment decisions.  More detailed information about Domain Money Signal is available at https://help.domainmoney.com/en/?q=signal