Last week, the SPDRS&P 500 ETF Trust (NYSEARCA:SPY) staged its best weekly rally for 2022. SPY stock rose by 5.82% on the week, crossing technical resistance at the 50-day and 200-day moving average. Serious investors cannot rely on technical charts alone to explain what happened last week.
Man standing behind a Wall Street chart with S&P 500 on top of it. SPY stock.
Source: Funtap / Shutterstock
The S&P 500 benefited from another major event that happens only once a quarter in the year: quadruple witching. After the euphoric buying following peak pessimism, what will it mean for SPY investing today?
The market needs to overcome a war in Europe, higher interest rates in 2022, hyper-inflation, and over-valued stock prices. After a rough start in the year with markets closing lower almost every week, is this achievable? The index needs many things going right before it ends up higher for the year.
Last week, the S&P 500 rose thanks to quadruple witching. This is an event in which stock index futures contracts, single-stock options, options on stock-index futures, and stock index options all expire on the same day. When this happened on Mar. 18, 2022, bulls won over the bears, sending the index up by almost 6% on the week.
The market also benefited from the U.S. Federal Reserve (Fed) kicking off interest rate hikes. It increased rates by only 25 basis points, as markets expected. The Fed likely assessed Russia’s invasion of Ukraine temporarily accelerating inflation. Still, an end to the war will not relieve supply chain issues. Before the invasion, businesses faced high shipping and trucking costs.
Additionally, China’s lockdown of a city with nearly 30 million people on Mar. 14 will exasperate global inflation.
Index investors need to appreciate the importance of rising costs. Since it shows no signs of slowing, SPY holders should anticipate interest rates between 1.5% and 1.75% in the next year. This will have a direct impact on the value of the S&P 500’s subsectors.
S&P 500 Performance Expectations By Sector
The consumer discretionary sector is highly sensitive to inflation. Companies that have a strong brand may pass higher costs to consumers. They will also hide higher costs through “shrinkflation,” meaning consumers will get fewer products in smaller packages at the same price. As long as they do not notice this, they will not substitute the good with a cheaper no-name brand.
On the SPDR Consumer Discretionary Select, Amazon.com (NASDAQ:AMZN) accounts for nearly one-quarter of the exchange-traded fund (ETF). Fortunately, Amazon Web Services (AWS) is the main driver of Amazon’s profits. It runs an efficient e-commerce business whose transaction volumes will grow this year.
Tesla (NASDAQ:TSLA), nearly 20% of the discretionary select ETF, has strong pricing power. It raised prices of its base model, the Model 3, citing higher input costs. It also increased the price of its self-driving option. This did not have an impact on demand.
For 2022, expect the financial sector to give the S&P 500 a strong boost. Higher interest rates increase bank income from deposits. Since banks hold a large cash balance of consumer deposits, they offer investors a good buffer against higher rates. In the Financial Select Sector (NYSE:XLF), JPMorgan Chase (NYSE:JPM), is 10% of total net assets. Bank of America (NYSE:BAC) and Wells Fargo & Company (NYSE:WFC) account for 7.7% and nearly 5% of assets, respectively.
Risks
Investor outflow may accelerate the sell-off in equities in the weeks ahead. For the week ended Mar. 17, 2022, Refinitiv reported a $14.7 billion outflow in mutual funds. Additionally, investors bought $5.7 billion in ETFs. Investors will increase total returns by avoiding high management fees from mutual funds. However, fund redemptions will increase selling pressure for companies not heavily weighted in ETFs.
Investors who were net sellers are acting like traders. Readers who trade SPY stock risk missing rallies. To avoid risks associated with timing the market, investors should have a long-term plan. For example, one could set a goal of buying a set amount of SPY stock after every paycheck.
Income investors may consider ETFs that pay dividends. This includes the Vanguard High Dividend Yield Index ETF (NYSE:VYM) and the Schwab U.S. Dividend Equity ETF (NYSE:SCHD). Investors get regular income and fewer potential capital gains. Conversely, the SPY ETF offers investors strong returns from the company’s capital appreciation over the long term. The disadvantage of dividend-income ETFs is that they give up capital returns
The S&P 500’s exposure to the technology sector is a valuation risk for investors. Assuming the economy slows down, the price-to-earnings multiple of tech stocks might fall. Still, aggressive investors may buy the Technology Select SPDR FundETF (NYSEARCA:XLK). Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) have the biggest weighting. Both companies are largely immune to an economic slowdown. For example, Apple has strong branding. It raised the price of device sales in the last few years without hurting consumer demand.
Microsoft’s Office 365 productivity software has no real competition. If user growth slows, Microsoft may raise subscription rates to sustain revenue growth in the year ahead.
Your Takeaway on SPY Stock
SPY investors need to embrace the rising market volatility. Ignore the short-term swings. Instead, consider adding more shares when prices drop.
In the long-term timeline, companies in the underlying index will keep growing. This will increase profits, rewarding index investors.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
