Stocks Bounce! | Investors Edge

By John Stewart, chief investment officer at Farmers Trust Co.

CANFIELD, Ohio — After a rocky start to 2022, stocks have staged quite a comeback in the past week. The rebound began with a strong rally last Friday that continued this past week as traders unwound bearish bets and dip buyers came into the fray.

Strong earnings from Google parent company Alphabet added to the shift in sentiment as investors are hoping that underlying fundamentals remain solid for America’s largest companies.

While we would agree that earnings fundamentals remain strong, there are some cracks in the façade. For one, overall earnings growth is in fact decelerating quite rapidly, and even though the majority of companies are beating expectations, it is a smaller majority than last quarter, and the average magnitude of earnings beats is less than it was in previous quarters.

There have also been several significant downside surprises and weaker forward outlooks from the likes of PayPal and Netflix. Both of those stocks dropped in excess of 20% after disappointing earnings reports.

Overall, not much has changed. The Fed is still on a path toward tighter monetary policy even as the economy appears to be decelerating. Despite the recent rebound, I’d expect a few more bumps in the road for markets during the coming weeks.

Featured Insight: Fade Investor Sentiment

The past few weeks have shown investor sentiment to be a rather powerful market timing tool. And while we don’t advocate trying to time the market, you can certainly use sentiment indicators to avoid making bad decisions.

Most investors buy when they feel good and things seem positive, and they sell when they feel bad and things seem negative. This is a natural force of human emotions.

The reality is that they should be doing they exact opposite, or they should at least try to avoid doing what everyone else is doing at extremes of market sentiment.

Investors headed into 2022 with a lot of optimism. Flows into equity mutual funds were strong and investor surveys showed little worry about market downside. Rarely is that a good time to take your pile of cash and go “all in” on stocks. In the first three weeks of January, the S&P 500 index proceeded to fall roughly 10% in value.

Sentiment was at the opposite extreme last week with bearishness at levels not seen since the COVID-induced plunge of March 2020. That is likely not the time you want to be selling. And right on cue, markets have bounced more than 5% from their lows this past week.

Looking Ahead: More Earnings, Inflation Data and Sentiment

Earnings season will continue in full swing next week with the likes of Under Armour, Disney, Pepsi and CVS just a few of the companies set to report their numbers for the fourth quarter of 2021

As always, the outlook for future earnings guidance will be far more important than the backward looking numbers reported. Future expectations need to start rising more aggressively in order for a durable rally in stock prices to continue.

Inflation numbers for the month of January will also be reported next week. Another reading above 7% is expected and should keep the Fed talking about planned interest rate increases as the year progresses.

The aforementioned inflation has been keeping consumer sentiment rather weak, and it will be interesting to see if sentiment has weakened further based on the equity market weakness experienced in January when numbers are reported next week. We’ll just have to wait and see!

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