Wall Street wrapped up the week with big gains on Friday, even as market observers said that investors probably hadn’t seen the last of the volatility that gave traders heartburn during a stomach-churning week.
In the short term, volatility should be expected,” said Daniel Milan, managing partner at Cornerstone Financial Services. “What we’ve been talking to our clients about, going back to December, is, in essence, a resetting of the market.”
Stocks on Friday continued to run with Thursday’s late-day rally, with two of the three major indexes erasing their losses for the week, which included a plunge Thursday morning so steep it briefly dipped the tech-heavy Nasdaq into bear-market territory, down 20 percent from its recent high.
Markets closed for the week with all three near their highs for the day. The benchmark Dow Jones notched not only its best trading day of 2022 but its strongest day since November 2020. The going rate for a barrel of Brent crude, an oil price benchmark, hovered around $98, down from the intraday high of nearly $106 it touched earlier in the week.
All told, it was a remarkable reversal. Since the beginning of the year, stocks — especially those of fast-growing, debt-hungry companies — have been struggling as traders digested the implications of a more hawkish Federal Reserve raising interest rates faster and higher in order to combat inflation at levels not seen since the early 1980s.
“Coming into this, we need to remember that the market wasn’t exactly in a good place. It was already fragile from an investor sentiment point of view,” said Liz Young, chief investment officer at SoFi. “There’s been quite a bit of multiple contraction, especially in tech names.”
Market sentiment during the first half of the shortened trading week (exchanges were closed on Monday for President’s Day) was driven by much of the same dynamic that had prevailed for the past several weeks, namely, concern that a collision between rising inflation and rising interest rates could throttle economic growth.
But while worry about inflation was still present, market momentum came to be dominated by the menace of a more immediate — and immediately dangerous — threat to geopolitical stability when, after weeks of rising tensions, Russian President Vladimir Putin launched a broad-based invasion into neighboring Ukraine.
“This is a period where the anticipation of the events is worse than the actual event itself. We saw a lot of fear going into the invasion,” Young said, but that fear proved short-lived, especially when U.S. President Biden said Thursday afternoon that sanctions against Russia would not bar it from exporting oil. Market observers also said some of the rally on Friday could be attributed to reports that Russian officials were willing to engage in talks with their Ukranian counterparts.
“As time went on, the interest rate story came back into play a little bit,” said Tim Courtney, chief investment officer at Exencial Wealth Advisors. “Today, we’re back to where we were at the beginning of the week. The market has, oddly, after a day, set aside the invasion risk.”
Moving forward, Chris Zaccarelli, chief investment officer for the Independent Advisor Alliance, said investors were likely to revert their collective focus back to the interplay between inflation and interest rates, especially in the next few weeks ahead of a March 15 meeting with Federal Reserve officials. “I do think markets are kind of missing the big picture, which is as bad as things are in Ukraine … and as much as that is a humanitarian crisis, I think the Federal Reserve is a much bigger threat to markets than what’s happening in Eastern Europe,” he said.
Milan said this week’s gyrations validate the advice that long-term investors should stay the course, in spite of short-term shocks. “The takeaway to me is, fundamentally, earnings are still good, money supply is still good. Inevitably, supply chains will correct back,” he said.
“If that geopolitical risk goes away, then we’re back to inflation and interest rates, which we have a better handle on from a data standpoint.”