Watching a grandfatherly, white-haired 69 year old man doing performative dance doesn’t sound like something hot-shot Wall Street traders and stock market professionals would choose to spend their time doing, but they very much are and that somewhat elderly gentleman is by far the the most important influence right now on the immediate trajectory of your net worth.
We are talking, of course, about Jerome Powell, the current Chair of the Federal Reserve, which needs financial conditions to remain tight to ensure its rate increases filter through the economy as desired: slowing demand and helping bring down inflation.
As we begin to look towards 2023, the focus of the markets will eventually turn towards the economy and earnings. But before that can occur, the Fed must finish its rate hike campaign. So for now by far the single biggest influence on stocks remains the Fed and the state of its impending rate hike crusade.
In fact, the Fed has been responsible for virtually every significant market pullback in 2022, and each time (January, May, June, August, September, October) it’s been because the Fed has signaled that interest rates will in fact rise more than the more upbeat financial markets had expected at the time.
Consequently, the looming final Fed interest rate decision of the year on December 14th will likely be the single event that determines if we get a “Santa Claus Rally” (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) in stocks, or another 10%+ pullback that pushes prices back towards the 2022 lows.
To understand the economic and market environment likely to prevail next year, you have to understand how Powell is trying to take the lead in a dance with financial markets and how, frequently, these markets don't cooperate.
Stock and bond markets are primed to see a policy pivot back toward the lowering of rates again and cheaper money around every corner and will seize on any nugget that fits this narrative.
That creates a dynamic in which every time Powell tries to add any kind of nuance to his messaging, indicating perhaps that the Fed doesn't intend to overdo things and cause more economic pain than necessary, stock and bond markets immediately rip irrationally higher in response. Did you see that?! The pivot! The pivot! The pivot is coming! Powell just said so!
In response, Fed policymakers are forced to take to stages and airwaves all over the country and give a round of speeches in which they try to dampen down the markets’ giddy exuberance.
And it is in the context of this dance that we should look at what Powell said in a speech last Wednesday; “It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting." He said absolutely nothing new, nothing that the market did not already know. Yet stocks rallied hard on the market’s chosen interpretation of his speech - seemingly overlooking the fact that, moments later, he also said; “It is likely that restoring price stability will require holding policy at a restrictive level for some time.”
St. Louis Fed president James Bullard then dutifully came out with a large bucket of ice-cold water, saying that the markets are “underpricing the risk” of a possibly more-aggressive-than-expected Fed and even put the specter of a terminal interest rate (the rate at which the Fed stops raising rates) of up to 7% on the table. It is currently forecasted to be about 5%.
All this was against the backdrop of continued COVID protests in China, the aversion of a national rail strike, red-hot Black Friday spending data, the contraction of US manufacturing for the first time after 29 straight months of growth and a benign inflation reading from the Personal Consumption Expenditures Index report - all ahead of Friday’s key jobs report.
Recession truthers suffered another setback when the report came out and showed that the jobs market remains on fire. Yet another 263k jobs were added in November, way more than expected. The jobless rate remains unchanged at 3.7%.
In true “good news is bad news”-style, markets initially reacted by plummeting, fearing that their holy grail of a pivot to the lowering of rates could well be postponed by this perfect excuse for the Fed to keep up (or even intensify) its campaign of raising rates as a result of the labor market remaining so hot. A late day recovery, however, left the indexes mostly in the green for the week.
OTHER NEWS
Crypto woes, this week’s installment ..Yet another important corner of the cryptocurrency universe crumbled into non-existence in the wake of the catastrophic FTX collapse. BlockFi, backed by venture capitalist Peter Thiel (whose recent banking venture GloriFi just went out of business after only three months in existence), filed for bankruptcy on Monday.
Interestingly, Blockfi’s fourth largest creditor is actually the Securities and Exchange Commission (SEC) which is still owed a good amount of the $100m fine it imposed on the company earlier this year for regulatory filing failures and illegal sales practices. Blockfi until recently offered enticingly high yields on over $10 billion of cryptocurrency deposits to the community of crypto bros, many of whom loudly mocked the rest of us for not indulging in the practice.
According to a report published in the Wall Street Journal on Thursday, it increasingly looks like the next shoe to drop in the utter shit-show that is crypto right now might be Tether Holdings which seems to have increasingly been lending its own coins to customers rather than selling them for hard currency upfront meaning the company may not have enough liquid assets to pay redemptions. This is starting to sound awfully familiar.
Indeed BlackRock CEO, Larry Fink, came right out at the New York Times DealBook Summit last week and said; “I actually believe most of the [crypto] companies are not going to be around.”
2022 word of the year .. The US dictionary publisher Merriam Webster announced on Monday that their 2022 word of the year is "gaslighting" or as Merriam-Webster defines it, "the act or practice of grossly misleading someone especially for one's own advantage." Interest in the term was up by 1,740% over the previous years according to searches of the online dictionary.
But its popularity among those looking up words in the online dictionary is also likely down to its somewhat complicated and sometimes vague meaning. The top definition of "gaslighting" from Merriam-Webster (inspired by the 1944 movie “Gaslight” starring Ingrid Bergman) is a form of psychological manipulation, usually over an extended period of time, that "causes the victim to question the validity of their own thoughts, perception of reality, or memories and typically leads to confusion, loss of confidence and self-esteem, uncertainty of one's emotional or mental stability, and a dependency on the perpetrator."
UNDER THE HOOD:
Wednesday afternoon’s big rally in stock prices following Powell’s comments lifted the Dow Jones Industrial Average to more than 20% up from its recent low, technically placing it back into a bull market. The S&P 500 also spiked above its long term trend line for the first time since April. However, caution is advised against reading too much into these “new bull market” clickbait headlines that you may have seen last week as a result of these relatively meaningless technical thresholds.
There continues to be a short-term divergence between the Buying Power / Selling Pressure dynamic (mostly negative in nature) and the behavior of the major price indexes (recently positive in nature) as buyers increasingly seem to be heading towards exhaustion.
Many technical readings are closely aligned with where they were at the time of a number of downward market reversals in the last year. For instance, just last August, a popular indicator was making the rounds that said since 1946, through 13 bear markets, every time the S&P 500 gained back 50% of its losses (which it had just done at the time), the bear market ended then and there. Unfortunately, 2022 did not get the memo and new lows were soon reached again.
There are similarities between the technical outlook then and now. The indexes which drove the recent rally are showing signs of running out of steam and while the sometimes quirky low-volume market conditions between Thanksgiving and New Year could be partly to blame, this is a concern for the bulls.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
Next week is relatively quiet on the earnings and economic data front, but there are still several notable earnings releases still coming including GameStop, Costco, LuluLemon, AutoZone, Campbell’s Soup, Broadcom and Chewy with General Electric and Lowe’s hosting investor days.
The Bureau of Labor Statistics will release the Producer Price Index (PPI) measure of wholesale inflation for November. Expectations are for a rise of 7.2% from a year earlier for the headline index and 5.9% for the core index, which excludes food and energy prices.
Economic data out next week includes the Purchasing Managers’ Sentiment Index for November on Monday. It's expected to decline to 53, which would be the index's most negative reading since May 2020 and the University of Michigan releases its Consumer Sentiment Index, which is expected to tick up a little from the previous month.
US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):
↑Bullish: 25% (down from 29% the previous week)
→Neutral: 35% (up from 31% the previous week)
↓Bearish: 40% (unchanged from 40% the previous week)
Net Bull-Bear spread .. ↓Bearish by 15 (Bearish by 11 the previous week)
Source: American Association of Individual Investors (AAII).
For context: Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
The highest recorded percentage of AAII bearish sentiment was 70% and occurred on March 5th 2009, right near the end of the Great Financial Crisis. The lowest percentage of AAII bears was recorded at 6% on August 21st 1987, not long before the stock market crash of October 1987.
Weekly sentiment survey participants are usually polled on Tuesdays or Wednesdays.
LAST WEEK BY THE NUMBERS:
Last week’s market color from finviz.com:
- Last week’s best performing US sector: Communication Services (two biggest holdings: Alphabet/Google, Meta/Facebook) - up 3.5%
- Last week’s worst performing US sector: Energy (two biggest holdings: Exxon Mobil, Chevron) - down 1.8%
- The NASDAQ-100 did better than the S&P 500
- Emerging Markets significantly outperformed International Developed Markets and US Markets
- Large and Small Caps both outperformed Mid Caps
- Growth stocks beat out Value stocks
- The proprietary Lowry's measure for US Market Buying Power is currently at 164 and rose by by 2 points last week and that of US Market Selling Pressure is now at 156 and fell by 4 points over the course of the week.
- SPY, the S&P 500 ETF, remains above its 50-day and 90-day moving averages and and last week moved above its long term trend line. The 14-day Relative Strength Index (RSI) reading is 63**. SPY ended the week 14.8% below its all-time high (01/03/2022).
- QQQ, the NASDAQ-100 ETF, remains above both its 50-day and 90-day moving averages. It is however still quite a way below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 59**. QQQ ended the week 27.4% below its all-time high (11/19/2021).
** RSI readings range from 0-100. Readings below 30 tend to indicate an over-sold condition, possibly primed for a technical rebound and above 70 are often considered over-bought, possibly primed for a technical decline.
- VIX, the commonly-accepted measure of anticipated upcoming stock market risk and volatility implied by S&P 500 index option trading (often referred to as the“fear index”) ended the week lower at 19.0. It remains well below its 50-day and 90-day moving averages. It also remains well below its long term trend line.
ARTICLE OF THE WEEK: “Mom and Dad, how much money have you got?” Why it’s a great idea to talk to your parents about their money.
EXPLAINER: FINANCIAL TERM OF THE WEEK:
A weekly feature using information found on Investopedia to try to help explain Wall Street gobbledygook (may be edited at times for clarity) .
A Santa Claus Rally describes a sustained increase in the stock market that occurs in the week leading up to December 25th. However, there seems to be some disagreement over whether these rallies happen in the week leading up to Christmas, or if it's the week after Christmas until January 2nd.
Looking at past price history, the week after Christmas is notoriously quiet and prices tend to move sideways in very narrow ranges. This makes sense if you think about it, as many market participants will take care of year-end position adjustments in the week before Christmas, while there is still plenty of liquidity. Further, this lull is most likely due to market participants taking the holiday break between Christmas and New Year's Day. As such, for the purposes of this article, we will assign the week leading up to December 25th as having the potential for a Santa Claus rally.
There are numerous explanations for the causes of a Santa Claus rally, including tax considerations, a general feeling of optimism and seasonal happiness on Wall Street, and the investing of holiday bonuses. Another theory, as mentioned, is that some very large institutional investors, many of which are more sophisticated and pessimistic than retail investors, tend to go on vacation at this time, leaving the market to retail investors, who tend to be more bullish, or positive, toward the market.
To see if there is any validity to the proposition of a regularly occurring Santa Claus effect, we looked back at the last 20 years of performance of the Standard & Poor's 500 (S&P 500) in the week leading up to December 25th. Based on our review of the data, we can state that there is minimal evidence of any discernible Santa Claus rally. The average return over the time period was +0.385%, or effectively flat.
Of the 20 weeks we analyzed, there were 13 weeks with a positive return, five with a negative return and two weeks with no change. The range spanned +5.4% in 2021 to -10.7% in 2018. Of the winning days, the average win was +1.58%, while the average losing day was -3.28 %. We think the numbers bear out the conclusion that there is no reliably meaningful Santa Claus rally.
Given such a small historical return, and a marginally positive frequency of occurrences, traders should be extremely cautious about buying or selling based on the supposed Santa Claus rally. While Santa Claus can be counted on to deliver the presents on Christmas, the stock market cannot be relied upon to always deliver gifts. That said, any positive gain in the stock market around Christmas is virtually guaranteed to lead financial market observers to refer to the Santa Claus rally.
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