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Markets plummet on earnings misses, jumbled manufacturing data

Investors are girding their portfolios for the coming Federal Reserve rate hike, and a correction seems to have come this week as all three indices fell sharply.

MANHATTAN (CN) — Wall Street took a header this week, due mostly to mixed bank earnings and manufacturing data, all driven by Covid’s impact on bottom lines.

The Federal Reserve is scheduled to meet for two days beginning Tuesday, and many investors think the central bank could finally set the date for its first rate hike of the year, though those in the know consistently circle March on their calendar.

In the meantime, markets have begun to correct off one of the fastest-rising bull markets in recent years, with all three major U.S. indices tumbling significantly. By the week’s end, the Dow Jones Industrial Average lost 1,646 points, the S&P declined 263 points, and the Nasdaq shed 1,128 points.

John Lynch, chief investment officer at Comerica Wealth Management, noted that the correction in markets is likely due to the impending interest rate hike by the Federal Reserve and that individual stocks already have signaling a market correction. “As investors reprice the risk of Fed rate hikes, the indexes simply need to catch up to their average stock,” Lynch said in a statement. “We believe solid growth in the economy and profits should preclude anything more than a 10% correction in the major equity indexes.”

A hodgepodge of earnings reports from big banks may have caused the rout early in the week. Shares of JPMorgan Chase and Goldman Sachs fell as both banks either failed to meeting analyst expectations or lowered their guidance for later in the year.

JPMorgan’s earnings beat out expectations, but the bank also reported high expenses during its fourth quarter and predicted expenses to climb 8% in 2022 due to inflationary pressures. The bank’s net revenue for the last quarter was about $400 million less than the third quarter of 2021 and $78 million less than the fourth quarter of 2020.

In its earnings release, Goldman Sachs similarly posted higher-than-expected expenses, failing to meet analyst estimates on earnings, though its revenue eked out a win over forecasts. During a conference call with investors, Goldman Sachs CEO David Solomon said that “there is real wage inflation everywhere in the economy, everywhere.”

“Earnings season is still in the very early stages but so far there’s one main takeaway, and it’s not especially positive for stocks: inflation is eating further into corporate margins,” Tom Essaye of the Sevens Report wrote.

He noted that compensation expenses are compressing margins for Goldman and JPMorgan, which could pose a quandary for investors who had relied on the strength of banks during the Covid crisis. “For banks and trading firms, compensation is the cost of doing business because it’s essentially intellectual capital that makes the firm money,” he wrote, “so if compensation rates are rising faster than profits, that’s a problem if it continues.”

Other data points reflected the continuing inflationary problems. Manufacturing data this week was mixed, with the New York’s Empire State Manufacturing survey reflected a leveling-off of activity this month while the Philadelphia Federal Reserve’s survey showed firmer growth.

The headline general business conditions index in the New York survey fell 33 points to -0.7, with more firms reporting worsening conditions than those stating conditions had improved over the past month. Just as concerning, the new orders index fell 32 points to hit -5.0 on the index. However, firms remain overall optimistic, as the index for future business conditions did not move from its 35.1 spot.

For the Philly survey, growth increased nearly 8 points to hit 23.2. Experts say this points to bigger growth in the region despite inflation as supply-chain bottlenecks remain issues of concern. Some experts had worried when the survey dropped 24 points in December, but the uptick offered some salve. Nearly three-fourths of firms surveyed reported that input prices had increased, while none reported decreases.

Other data points are losing positive ground, too. On Thursday, the Labor Department reported another increase in unemployment claims, this time to the tune of 286,000 initial claims for the week ending January 15. This marks the fourth week that unemployment claims have ticked upward, though they are still lower than they were since mid-October.

Most experts say this is likely due to the surge in Covid-19 cases due to the omicron strain, which is ultimately a good thing since it appears that omicron is starting to plateau. “I’m still hearing too many stories of labor market disruptions because people are calling in sick,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Services. “Expect February to normalize as the omicron numbers will soon be collapsing.”

Nearly 9 million Americans reported not working in the first two weeks of January due to Covid sickness — or caring for somebody who was sick with the virus — about three times as many as reported that in early December 2021 and 2 million more than reported that last January.

Fortunately, cases of Covid-19 have dropped in the last week, with new infections declining from the nearly 800,000 average daily infections that were reported earlier this month. That may seem little comfort for the nearly 70 million Americans who have contracted the disease and 861,000 who have died from it, as reported by Johns Hopkins University.

Nancy Vanden Houten, lead U.S. economist at Oxford Economics, agreed that omicron has played a huge part in the unemployment increase but added that seasonal factors also added to the overall headline number. “We expect claims to gravitate back to the 200k level or lower once the omicron wave passes, and there continue to be encouraging sings that the surge in new cases has passed its peak,” she wrote.

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