AAP Morning Comments: Market Selloff, Fed Rate Hikes, Portfolio Investing

U.S. equity markets ended their most challenging week since March 2020, the start of the pandemic, on a weak note. The S&P 500 fell 1.9% on Friday, adding to the week's losses, while the Nasdaq Composite declined 2.7%, the Dow Jones Industrial Average lost 1.3%, and the Russell 2000 closed 1.8% lower. The pain was rather broad-based with eight of the 11 S&P 500 sectors falling at least 1.0%, including the communication services sector with a 3.9% decline. The flight to safety was evident as the consumer staples sector eked out a very modest gain for the day. Coming into this week, here's how the major U.S. equity market indexes stack up on a year-to-date basis:

• Dow Jones Industrial Average: -5.7%
• S&P 500: -7.7%
• Russell 2000: -11.5%
• Nasdaq Composite: -12.0%

And with that, we are starting the week off facing a confluence of factors that are once again weighing on stocks, pointing to the continuation of last week's selloff.

• January Flash PMI readings for the UK, Eurozone, and Japan confirm the Omicron variant is weighing economic activity in those regions and inflationary pressures across the Manufacturing and Services economies remain.
• Geopolitical pressures are also running high following the State Department instructing families of diplomats and some U.S. embassy staff members in Ukraine to leave the country. According to reports, in response to Russia continuing to build up its forces near Ukraine, President Biden considering sending troops, warships, and aircraft to Eastern Europe.
• Early this morning the United Arab Emirates (UAE) Ministry of Defense announced its air defense forces had intercepted and destroyed two ballistic missiles fired by Houthi terrorist militia that targeted the UAE.

To the above, we can add the call by Goldman Sachs (GS) that it now sees inflationary pressures leading the Fed to hike interest rates "by over four times" this year, and reports House Speaker Nancy Pelosi (D-CA) acknowledged discussions for a smaller Build Back Better Act will be put on the "back burner" while they discuss other topics like China's competitiveness and government funding. The latter call will exacerbate market tensions and fan growth concerns while the push back in the Build Back Better Act will lead to some GDP forecast trimming in the coming quarters.

All in all, the early morning happenings will, at least at the market open, push equities lower, adding to their deeply oversold condition. Our suggestion to members is to view the current market environment not as a painful one, but rather one that is allowing for a fresh bite at quality companies at far better share prices than we've seen in some time. Last week, we nibbled on several existing positions, and will likely do so again in the coming days recognizing the technical setup of the market and the likelihood of a bounce back. If subscribers are underweight shares of Deere & Co. (DE) , Costco Wholesale (COST) , Applied Materials (AMAT) , Morgan Stanley (MS) , Microsoft (MSFT) , Skyworks (SWKS) , and BlackBerry (BB) , to name more than a few, current price levels skew heavily toward the reward side of the teeter-totter.

Later this morning, we'll get the Flash January PMI data for the U.S., and as we digest it, we will be comparing and contrasting the learnings with the same reports for the Eurozone, UK, and other regions.

Action Alerts PLUS is Long DE, COST, AMAT, MS, MSFT, SWKS, BB.