The stock market slipped Friday morning amid news that banks posted mixed earnings in the fourth quarter of 2021. The sell-off has primarily impacted tech stocks, but it has dragged down futures contracts on the Nasdaq, Dow, and S&P 500. Shares of JP Morgan Chase fell Thursday after the bank posted its disappointing fourth-quarter revenue, surprising analysts who expected the bank to record record-breaking revenue.
Wells Fargo’s stock price soared Thursday after it published its better-than-expected revenue numbers. The bank’s share value is the rare bright spot Friday morning, as economic data shows the US economy struggling in December and January. US retail sales dipped nearly 2% in December, indicating that American customers could be growing apprehensive regarding rampant inflation.
Investors are concerned that this price pressure could cause a ripple effect in the US economy. Inflation has essentially wiped out workers’ wage gains from 2021, slowing the market and leading to many employees saving their money instead of spending. This pattern has investors selling out of growth stocks and hedging their bets on cyclical assets like energy.
Fed Addresses Inflation
The Federal Reserve says it’s ready to take dramatic action against inflation. The central bank characterized rampant price spikes in 2021 as “transitory,” frustrating economists who saw the economy slowing under the inflation rate. Now, the Fed says it could raise interest rates as soon as March.
“We do have a powerful tool and we are going to use it to bring inflation down over time,” Fed governor Lael Brainard told the Senate Banking Committee on Thursday. President Joe Biden nominated Brainard to the vice-chair spot in the Fed. If the Senate confirms her nomination, she’ll be second only to Fed Chair Jerome Powell.
The Fed brought its federal funds rate to near-zero in March of 2020 in a bid to keep borrowing demand high through the economic slowdown. This gambit worked, and the US economy remained liquid throughout 2020 despite a short-lived recession and global shipping pressures. Now, the Fed is finally considering hiking interest rates to shrink the volume of liquid capital in the market.
“What we’re seeing right now is a repricing of the markets, given anticipated rate hikes… That’s going to be the catalyst driving down the market,” says Loreen Gilbert, the CEO of WealthWise Financial. “It’s going to be a wild ride.” Higher interest rates and the Fed’s shrinking balance sheet could cool the economy off, stabilizing consumer prices but shredding growth stocks. This could push more investors into cyclical, steady stocks that perform better in cooler economic conditions.
Rising Costs Impact Companies and Customers Alike
Inflation isn’t just making life miserable for customers. Sixty percent of the S&P 500 companies that reported fourth-quarter earnings noted that higher labor costs and product shortages impacted their bottom line in 2021. Workers are demanding higher wages to keep up with the rising inflation rate, while companies continue to pass these costs to consumers.
The Producer Price Index jumped to its highest recorded annual rate ever throughout December, pushing wholesaler prices up 9.7% on the year. For example, Citigroup posted unimpressive revenue in the fourth quarter because of higher expenses in 2021. The bank’s revenue fell 26% as it faces higher costs to address issues regulators found in its control systems. The bank’s struggling numbers spooked investors, leading to Citigroup’s share price falling 3.5% in pre-market trading Friday.
Tech Stocks Move Friday Morning
Investors are anxiously watching mixed signals in the tech sector Friday morning. Shares of Apple are up 0.63% on the day, trading above $173. Meanwhile, the electric car manufacturer Tesla has slipped just under one percentage point this morning. The American automaker’s shares are still up through the week, surging to $1,032 from recent lows under $1,000.
Microsoft’s stock price is spiking Friday morning, jumping 1.35% to nearly $309 per share. The start of the year hasn’t been smooth sailing for the tech giant: it lost 5% of its value in the first two weeks of the year due to pressure on the tech sector as a whole. However, some analysts believe Microsoft is heading for a $3 trillion market cap in 2022.
“Despite multiple/valuation compression and a tightening Fed backdrop, we believe Microsoft’s stock continues to go higher over the next six to nine months as the Street is still underestimating the underlying growth story,” says Wedbush analyst Dan Ives. “We believe Microsoft is on its way to a $3 trillion market cap over the next 12 months.”
The only other company that has brushed a $3 trillion market cap is Apple. Tech analysts think Microsoft could soar past that benchmark due to business demand for cloud computing through its Azure platform. As more workers telecommute and rely on cloud services to handle their daily tasks, Microsoft’s Azure service will become an integral part of many workers’ daily lives.