Last Monday we said, “Although the S&P500 held at the support level we were expecting, it seems unlikely that we will see a big upside move in the near term.
And it turns out that despite plenty of stock market moves, the major indices basically closed where they were at the start of the week. The S&P 500 was down just over a percentage point on Friday.
It is good that traders are “watching” the crisis in Ukraine, and stock prices have remained stable. However, the crisis remains the biggest unknown for the stock market and will continue to overshadow the normal flow of fundamental information.
And the longer the crisis drags on, the worse the global economic outlook will get because it has pushed up – and will continue to push up – energy prices. Ukraine and Russia are key components of the energy market, and energy is a key driver of inflation.
The Positive Side
As everyone has discovered over the past year, inflation fears are bad for the stock market.
At this point, we have to reiterate most of our recommendations from last Monday: the stock market is going to be choppy this week and it will be difficult to forecast accurately. Investors looking to take profits in the energy sector should keep their fingers close to the sell button, but there may still be a little more potential if you can tolerate the risk.
Okay, that was a little dark – but there are some real positives to be had from this market as well.
First, we’ve spent 20 years teaching investors how to use stock options to increase their income in the stock market. This is relevant right now because options inflate in value when the stock market is choppy.
It’s a good time to subscribe to our YouTube channel, Learning Markets, where tonight we’ll discuss three ways to look at potential market outcomes this month. We hope it will provide some peace of mind in turbulent times. Click here to join us at 7:00 a.m. ET tonight.
So even for investors with little experience in using options, this is a particularly productive time to boost profits from income when stock prices are essentially locked in. Buying options has a deserved reputation for being very risky, but selling them helps us control risk.
Second, the stock market has fallen due to external issues like Ukraine, although the conflict has yet to change economic fundamentals in the United States. For example, last Friday the unemployment rate fell to 3.8% in the United States, with the creation of nearly 700,000 new jobs. to the economy. It was well beyond expectations for both measures.
This means that prices have been pushed lower and do not take into account the growth that has occurred over the past three months. Right now, we think patient investors are likely to get the best deals in the technology and consumer discretionary, aka retail, sectors. Investors are distracted by the breaking trends in energy and defense stocks, but somehow these trends will quickly reverse once there is a timetable for the end of the conflict in Ukraine . At this point, we expect technology and retail to pick up.
For example, Target (NYSE:TGT) and best buy (NYSE:BBY) both rose more than 10% last week after surprising investors with much higher-than-expected earnings. Right now we think Nike (NYSE:NKE), and Ultimate (NASDAQ:ULTA) are likely to repeat that performance when they report over the next two weeks.
It’s another week where there isn’t a lot of additional news that we can plan on. After Fed Chairman Jerome Powell set expectations for just one quarter-point rate hike this month during testimony to Congress last week, we’re not as concerned about the news. on inflation.
However, keep your eyes peeled on Thursday when the Bureau of Labor Statistics releases the Consumer Price Index (CPI) again. As you know, the numbers are high right now and rising energy prices are not going to improve the situation this month.
Also, on Friday, the University of Michigan will release its closely watched “Inflation Expectations” report. This survey usually goes beyond what inflation and interest rates will actually do, but it does impact market expectations anyway. And in the stock market, expectations tend to have a more reliable impact on prices than data.
In conclusion it’s hard do not be confused and uncertain right now. While underlying market fundamentals are strong, uncertainty surrounding the impact of the crisis in Ukraine is keeping prices low. However, we believe it is still a good time to accumulate stocks while prices are low.