Tuesday Morning Reads
- Curb Foreign IPOs
- The Rise of the Crypto Mayors
- What’s a ‘Crypto Winter’?
- This Red-Hot Housing Market
- Oil Companies Are Whining
- Baptism By Fire
- Strategists Predict Trouble
- Fed’s Policy Pivot
- The U.S. Labor Movement Is Popular
- Why Is Silicon Valley Still Waiting
- Cash Aid to Poor
Things are getting wild in equity markets as traders try to size up the latest outsized moves. A rowdy session on Monday saw the biggest Nasdaq comeback since 2008, as the index ended the day up 0.6% following a midday plunge of nearly 5%. Similar movement was seen with the Dow and S&P 500, which both ended the session in the green despite an earlier drop of 3.3% and 4% (at one point the S&P 500 even fell into correction territory).
Quote: "The buyers are coming in to buy the dip here," said Lindsey Bell, chief money and markets strategist at Ally Invest. "Things looked a little bit over-stretched to the oversold side, so it's not surprising. But that doesn't mean we are going to be in the clear. There is a lot that we have going on this week."
That forecast couldn't be more on point, with stock index futures plunging again overnight. At the time of writing, the Dow is off more than 250 points, while contacts linked to the S&P and Nasdaq are down 1.3% and 1.9%, respectively. Investors are nervous about red-hot inflation landscape and accompanying rising rate environment in 2022, as well as the risk of a policy mistake. There are additional fears that the economy is losing (or could lose) some momentum or that earnings season may not be perceived as positively as it has been in the past.
Analyst commentary: "We're in what I call the triple threat of... rapidly rising rates, and the market has been working overtime, as have all of the algorithms, to try to figure out what that means, and what that pace means for valuations and global equities," explained UBS Private Wealth Management's Alli McCartney explained. "For the last decade, the market has been able to count on the Fed to support growth. It is now swinging the pendulum and having very different acts to take care of, while the market is figuring out what that means for valuations."
As the stock market continues to stumble in 2022, many are looking at the possibility of the Federal Reserve dialing back on its upcoming policy tightening. FOMC officials are meeting today and tomorrow for their January meeting, with Jerome Powell's closely watched press conference coming at 2:30 p.m. ET on Wednesday. Investors will be watching comments on three key areas in particular, including interest rates, the tapering of asset purchases and a reduction of the central bank's balance sheet.
Flashback: In recent years, the Fed has pivoted toward a dovish direction in the face of market turmoil. One instance was in early 2016, when it flagged risks from an economic slowdown in China and the strengthening U.S. dollar. The other came in late 2018, when stocks sold due to four rate hikes that year and a policy tightening cycle.
However, this time around, the Fed may be less inclined to halt its plans. Inflation has taken over the conversation - and what may come as a surprise to some investors - price stability (not markets) is actually part of the central bank's dual mandate. Investors are even pricing in at least four rate hikes in 2022, with the 10-year Treasury yield soaring as much as 40 basis points to 1.9% in the first three weeks of the year.
What they're saying: "We doubt that Chair Powell will feel much need to make soothing noises in Wednesday's press conference," wrote Lou Crandall, chief economist at Wrightson ICAP. "I don't think anything the Fed is going to do is going to make the markets happy," added Louis Gargour, chief investment officer at LNG Capital.
Stock investing since the global financial crisis has been heavily rooted in TINA, an acronym that stands for "there is no alternative." That has helped drive many of the explosive valuations we see today, however, the prospect of higher interest rates is starting to weigh on the sentiment. TINA has also created subcultures of its own, like the retail crowd, and the somewhat rebranded moniker "Stonks Only Go Up."
Keep in mind: In any market environment, especially the current volatile one, it is important to have some portfolio protection. That includes diversification, having cash on the side, or staying in your long-term positions and not getting too emotional. Investors that do want to dip into pockets of the markets are generally advised to do so in smaller amounts as the trading landscape becomes clearer.
For those looking to put money to work, many analysts have said it is (or was) time to get defensive, or rotate out of high-growth areas of the market in favor of safer bets. Others are searching for yields, like stable dividend payers, or even revenue producing tech players. Commodities, utilities, consumer staples and REITs are other sectors attracting attention, while some feel that "buying the dip" can be profitable in any number of sectors. Other strategies? Discuss in the comments section below.
Eyes on earnings season: "Perhaps Apple (AAPL), Microsoft (MSFT) and Tesla (TSLA) can come to the rescue with some knockout numbers when they report this week," said Russ Mould, investment director at AJ Bell. "On the other hand, a series of disappointing updates from these technology titans would only undermine sentiment further."
The bulls: "Considering expectations for solid gains in the economy and corporate profits... we're not convinced the fundamentals support any near-term technical weakness beyond the classic 10% correction," said John Lynch, chief investment officer for Comerica Wealth Management. "A review of the technical and fundamental backdrops suggests a bottom is forming."
"These kinds of bottoms tend to be revisited, as the
now fallen 10% from its high, and those who bought at the lows will scalp their gains," noted CNBC's Mad Money host Jim Cramer. "The bottom line: If you bought into Monday's weakness as I've been telling you to do... if you bought into what sure looked like a crescendo of selling, then I think you'll end up being happy with your decision."
The bears: "The game has changed," said Michael Lewis, Barclays's head of U.S. stock trading. "It's going to be a tough year. It's going to be a tough year for people to make money. From 2009 to 2021, you've been paid to buy the dip. I don't think you buy the dip anymore."
"This type of action is just not comforting. I don't think anybody is going home feeling like they've got this thing nailed even if they bought the lows," commented Mike Wilson, chief U.S. equity strategist at Morgan Stanley. "We think the slowing growth narrative is the one that is going to be more important. It's not a recession or anything like that... but the S&P 500 [is vulnerable to another 10% plunge] below 4,000 in the next three to four weeks. At the level, we'd start to get constructive given our base case of the index of 4,400 by year-end."
"The data hasn't been soft enough for the Fed to stop the tightening process. Some companies may also take the opportunity during earnings season to lower the bar a bit because it's a tough operating environment. We're not making a big bet on cyclicals here like we were a year ago because growth is decelerating. People got a little too excited on these cyclical parts of the market, and we think that's wrong-footed."
In Asia, Japan -1.7%. Hong Kong -1.7%. China -2.6%. India +0.6%.
In Europe, at midday, London +0.9%. Paris +1%. Frankfurt +1.7%.
Futures at 6:20, Dow -0.8%. S&P -1.3%. Nasdaq -1.9%. Crude +0.7% at $83.91. Gold -0.2% at $1837.40. Bitcoin +7.9% to $36314.
Ten-year Treasury Yield +5 bps to 1.79%
Today's Economic Calendar
FOMC meeting begins
8:55 Redbook Chain Store Sales
9:00 S&P CoreLogic Case-Shiller Home Price Index
9:00 FHFA House Price Index
10:00 Consumer Confidence
10:00 Richmond Fed Mfg.
1:00 PM Results of $55B, 7-Year Note Auction
1:00 PM Money Supply
Saying goodbye to the combustion engine, Lamborghini goes full electric.
COVID talk... New York judge blocks statewide mask mandate.
Aerial surveys detect 30 methane 'super-emitters' in Permian Basin.