- Stocks and bonds selling off in tandem...that's highly unusual
- Big banks kick off Q4 earnings season
The first week of trading in 2022 proved to be volatile, with the turbulence likely to continue into the week ahead.
Though last week started with a new record high for the S&P 500, it was mostly downhill from there for all the major US indices. At the close of trade on Friday, all four benchmarks had been sold off. Adding to the unsettled nature of equity markets last week, and likely next, the CBOE Volatility Index (VIX) rose, for the first time in three weeks.
The two biggest losers for the week were the NASDAQ Composite, -4.5%, and the Russell 2000, -2.94%; perhaps equally telling, the mega cap Dow Jones, which primarily lists blue chip value stocks, was down, albeit just 0.3% over the same period.
Treasuries were sold off too, pushing yields to their highest levels since January 2020, when the coronavirus outbreak appeared to be a regional health problem limited to just China.
The midweek release of the FOMC's December minutes, which indicated the Fed had become more hawkish than markets had perhaps anticipated, and Friday's disappointing Nonfarm Payrolls, which printed well below expectations, contributed to the gloomier outlook on risk as the week progressed.
Unusual Market Pairings, Multiple Accelerating Risks
Usually, government bonds tend to possess a negative correlation to stocks, but last week equities and Treasuries declined in unison—a rare occurrence. In general, investors sell debt in order to free up cash with which to purchase stocks. As such, stocks typically rise with yields as traders rotate between capital preservation and growth.
However, with the current outlook for rising interest rates via upcoming Federal Reserve rate hikes, which many believe could start as early as March, there's a different dynamic at play. Higher rates from the Fed render current Treasury yields too low. That's why, on a relative basis, last week, short-dated bonds outperformed.
Typically, a spike in yields—such as occurred for the 10-year note and other Treasuries—after the single biggest fundamental threat to the economy in at least a generation, the COVID pandemic, would be considered a distinctly positive signal for stocks. However, given that the bond selloff was not risk-based, we don't see this as a reliable bullish indicator.
Having registered above the Mar. 29 high, yields have officially established an uptrend. However, rates found resistance at these levels, and settled below the previous peak. If yields were to fall below the July 19, 1.128% low, they would complete a double top.
Investors are sure to monitor Federal Reserve Chair Jerome Powell's testimony on Tuesday at his nomination hearing in front of a Senate panel, and Wednesday's Consumer Price Index will likely also cause market ripples.
At the same time that investors are struggling to maintain their bearings amid escalating inflation and Fed tightening, fourth-quarter earnings season officially begins this week, with JPMorgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C) all reporting on Friday, making it an even more complex period for market participants struggling with multiple, major fundamental themes simultaneously.
Along with stocks and government bonds performing in tandem, another unusual pairing has also been playing out. High-growth, mega cap tech stocks, the darlings of a locked-down economy, and small cap domestic shares, which generally outperform on signs of a reopening economy, were both pressured last week.
That's on account of dual stresses: Rising interest rates render the soaring valuations of mega tech shares even more expensive, while domestic small caps that don't have a solid online presence are most sensitive to rising rates of COVID, which keeps spreading, as global cases top 3 million, increasing the risk of additional pandemic restrictions.
By removing companies requiring an open economy from the list of beaten down shares, the remaining value stocks were the obvious winners, as indicated by the Dow's 'outperformance,' at the week's finish.
Among S&P 500 sectors, Energy led with a 10.52% gain, followed by Financials' +5.43% rally. Industrials rose 0.64% with Consumer Staples the only other sector in the green, lagging at 0.4%. As noted above, Technology underperformed, dropping 4.57%, second only to Real Estate which was down 4.9%.
The NASDAQ 100 showed signs of topping out, falling below the uptrend line since the March 2020 bottom after moving sideways since its November record.
The Russell closed within a half-percent of its lowest level since Feb. 1.
For now, savvy investors will keep monitoring Treasuries which have been providing a leading indicator to stocks.
As for the dollar amid all this, it appears that a pattern we expected to be bullish is breaking down.
Strangely, it looks as if the greenback is setting up to fall amid an outlook for higher rates. We're hoping the price will find support by its uptrend line.
Gold is also trying to find its footing.
The precious metal has been trading within a range since August 2020.
Bitcoin completed an H&S top, with a 6% penetration of the neckline.
Usually, that would be a good filter for even the most cautious investor. However, cryptos are unpredictable. Nevertheless, we're betting Bitcoin will extend its drop, with the following test coming at the $30K level.
Oil is headed higher, after gaining 5% during the past week. Additional crude gains will be fueled by the unrest in oil-rich Kazakhstan's main city Almaty. As well, Libya's output has been reduced to 729,000 barrels a day from the high of 1.3 million a day, in part because of pipeline maintenance.
WTI rose for the third straight week, possibly avoiding an H&S top, but the energy commodity is still at risk of trading within a bearish wedge.
The Week Ahead
All times listed are EST
Monday
19:30: Australia – Retail Sales: expected to have retreated in November to 4% from 4.9%.
Tuesday
5:20: Eurozone – ECB President Lagarde Speaks
10:00: US – Fed Chair Powell Testifies
12:00: US – EIA Short-Term Energy Outlook
Wednesday
8:30: US – Core CPI: seen to remain steady at 0.5% MoM.
10:30: US – Crude Oil Inventories: last week's print showed a drawdown of -2.144M.
Thursday
8:30: US – Initial Jobless Claims: predicted to edge lower to 205K from 207K.
8:30: US – PPI: likely dropped to 0.4% from 0.8%.
Friday
2:00: UK – GDP: printed at 0.1% MoM previously.
2:00: UK – Manufacturing Production: forecast to edge up to 0.2% in November, from 0.0% in October.
8:30: US – Core Retail Sales: expected to slip to 0.2% from 0.3%.
8:30: US – Retail Sales: to fall to -0.1% from 0.3%.