In a horror movie, it often happens that the poor young person being chased in the house gets right to the front door and is just about to escape onto the street when the killer suddenly jumps out and grabs them. As an audience, we are teased with the prospect of good news when, suddenly, that hope is snatched away. That’s pretty much what happened in the stock market last week, specifically with the critical aftermath of the Federal Reserve Open Market Committee meeting on Wednesday.
The market bled steadily lower early in the week amid mostly quiet news flow. On Tuesday, the Job Openings and Labor Turnover Survey (JOLTS) for September showed openings of 10.7 million which was was a surprising increase from August, defying economists’ forecast for a decline. For stocks, the jolt was to the downside. Investors are currently looking for any excuse the Fed could use to pause its rate hikes. A slowing economy would be Reason Number One. But more job openings suggests the opposite - it suggests a still-strong economy that could force employers to offer higher wages to fill opened jobs. That's a recipe for more inflation, not less.
Markets continued to heavily punish the companies that fail to match earnings expectations. You can see from the market heat-map below in LAST WEEK BY THE NUMBERS who the most beaten-up victims were.
But spirits initially lifted on Wednesday when the Fed dangled some teasing “pivot-y” language with its statement announcing a 0.75% rate hike, saying that a slowdown decision could come soon and that further moves will take into account “cumulative tightening”, policy lags and additional upcoming economic data.
The stock market lapped this language up, taking it to imply a more measured response going forward, in recognition of the fact that there has been a lot of cumulative raises in interest rates already and that the lag-time involved meant that those hikes previously made could have baked in some future benefits, reducing the Fed’s need to add to them quite so enthusiastically.
Markets thought they got what they wanted from the Fed’s penultimate meeting of the year, before it was cruelly snatched away.
In the subsequent press conference, Fed chair Jerome Powell emphasized that the central bank has “a ways to go” in tightening policy enough to bring inflation down to its 2% target, and for that reason, he declared it premature to talk about pausing rate increases. “We have some ground to cover with interest rates,” he said, adding that “there’s no sense that inflation is coming down.”
He would not be drawn, despite the best efforts of the financial news hacks at the presser, on predicting the all-important Terminal Rate (the rate of the Fed Funds rate on the day that the Fed announces an end to the rate hike cycle).
He did say “I would want people to understand our commitment to getting this done, and to not making the mistake of not doing enough or the mistake of withdrawing our strong policy and doing that too soon,” . Scary stuff and kryptonite to stock prices.
Simply put, the message Powell sent out was that the size of future rate hikes will have no effect on when the Fed stops raising them and that these two are not particularly inter-dependent. Seeing a slowing in the extent of the rate hikes (0.50% or even 0.25% instead of 0.75%) does not necessarily indicate that the Terminal Rate (which is a far more important consideration) will be lower as a result. This distinction has now been made very clear. It sent stocks tumbling when it sunk in. The killer had just jumped onto the screen, brandishing a pretty large knife.
As investors absorbed what they had just heard, selling picked up rapidly throughout the rest of the afternoon during and after Powell’s words. The NASDAQ index, the epicenter of market valuation worries and brimming with companies that are most heavily impacted by higher interest rates, dropped over 3%. By the end of the day, the market had experienced its worst intra-day reaction to a Fed meeting since Elton John asked us all if we could feel the love tonight in 1994.
The mostly spectacular performance of equities in October suggested that the market really expected to thrown a bone by the Fed on Wednesday but was strongly disappointed. Friday’s recovery, driven by a mostly neutral jobs report which showed the unemployment rate climbing from 3.5% to 3.7%, helped to cut into the losses somewhat, but a good number of stocks (mostly in the Technology and Communication Services sector) had a rather dire week.
OTHER NEWS
And then there was one .. Remember back in the day when we all thought that an exclusive group of about six mega-tech names was driving the whole market higher? Well membership of that club is now down to just one. Even after a really bad week for the stock, Apple (AAPL) is still bigger (as measured by market capitalization) than ex-group members Meta/Facebook (META), Alphabet/Google (GOOGL) and Amazon (AMZN) combined!
Shilling for crypto .. Disgraced ex-UK prime minister Boris Johnson will address a cryptocurrency conference in Singapore next month as he forges a speaking career. Having failed to secure a second stint in the job, BoJo will be the featured keynote speaker at the International Symposium on Blockchain Advancements on December 2nd. He remains the Member of Parliament for his constituency but will skip attending Parliament in order to speak at the event. It is currently unknown how much he will be paid for his address, but he recently skipped his Parliamentary responsibilities to fly to the US to make a 30-minute speech to the Council of Insurance Agents and Brokers in Colorado for which he was paid $150k, which is close to double the annual salary of a UK Member of Parliament.
Crypto evangelists are getting more and more desperate to try and restore some kind of credibility after a long “crypto winter” (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) during which prices have crashed and multiple criminal crypto frauds have been exposed, resulting in institutional and individual investors losing billions of dollars. Johnson is not the only former high-level politician speaking at the event in Singapore. He will be joined by Dick Cheney, the US vice-president from 2001 to 2009.
UNDER THE HOOD:
Despite the difficulties experienced recently by some big name stocks, broad market elements that often occur at major market bottoms, such as panic selling swiftly followed by panic buying on volume spikes, are still AWOL. In particular, volume showed no sign of spiking at or near the lows and is not increasing as it kind of needs to whenever Demand comes rushing back in.
Although some markets find their bottoms when everyone loses interest, the majority form when urgent selling pushes prices lower to the point where sellers are exhausted and buyers finally believe stocks are attractive. It is simply difficult to find evidence of this process yet.
Of the giant stocks that led the multi-year bull market into the January 2022 peak, Microsoft (MSFT), Amazon (AMZN), Tesla (TSLA), and Alphabet/Google (GOOGL) are all at or near one year lows, but a worryingly high percentage of small-cap stocks are also in the same kind of territory. With both the “generals” and the “soldiers” showing weakness and the S&P 500 now simply back to where it was in June, it is difficult to see how a bottom formation is underway.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
This week will be another busy one for investors: the U.S. midterm elections, the latest inflation data, and a continued parade of Q3 earnings reports from the likes of Disney, Dupont, Occidental Petroleum, Activision, Take-Two Interactive, NRG, Ralph Lauren, Mosaic, Tapestry and DR Horton.
Voting in the mid-terms on Tuesday will determine control of Congress for the next two years, with Republicans favored to win the House of Representatives and polling suggesting they may also win control in a close race in the Senate. Results may take days to become clear in several states, with even run-offs possible (I’m looking at you, Georgia). The stock market actually tends to quite like gridlock between the branches of government as it basically means less change.
But the big daddy event of the week is Thursday's release of the October Consumer Price Index (CPI) measure of US inflation. The consensus estimate is for a 0.7% increase in retail prices month-to-month and for a lower annualized rate of 8.0%. The Core CPI, which excludes food and energy components, is expected to have risen by 0.5% month-to-month and 6.6% from a year earlier.
The University of Michigan's Consumer Sentiment Index will be out on Friday and is expected to also be about flat with the previous month's reading.
US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):
* ↑Bullish: 31% (up from 27% the previous week)
* →Neutral: 36% (up from 28% the previous week)
* ↓Bearish: 33% (down from 46% the previous week)
* Net Bull-Bear spread .. ↓Bearish by 2 (Bearish by 19 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 financial crisis bear market. 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: Energy (two biggest holdings: Exxon Mobil and Chevron) - up 2.4%
- Last week’s worst performing US sector: Communication Services (two biggest holdings: Meta/Facebook, Alphabet/Google) - down 6.8%
- The NASDAQ-100 severely underperformed the S&P 500
- Emerging Markets were the big winners last week, way ahead of US Markets and International Developed Markets
- Mid Caps did less badly than Small Caps which then did less badly than Large Caps
- Growth meaningfully underperformed Value
- The proprietary Lowry's measure for US Market Buying Power is currently at 149 and fell by by 10 points last week and that of US Market Selling Pressure is now at 172 and rose by 10 points over the course of the week.
- SPY, the S&P 500 ETF, has now moved back below its 50-day and 90-day moving averages and remains below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 50**. SPY ended the week 21.2% below its all-time high (01/03/2022).
- QQQ, the NASDAQ-100 ETF, has now moved back below its 50-day and 90-day moving averages and remains below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 42**. QQQ ended the week 34.5% 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 24.6. It remains below its 50-day and 90-day moving averages. It also remains below its long term trend line.
ARTICLE OF THE WEEK:
Long-time readers know I can never resist an article that exposes the futility of making market predictions. Those who claim to know how to do so with any meaningful degree of success are liars and frauds.
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) .
Crypto winter is a common expression that refers to a poorly performing cryptocurrency market. The term is comparable to a bear market in the stock market. A crypto winter signifies negative sentiment and lower average asset values among a large swath of digital currencies.
Research shows that crypto winters have a major impact on investor mentality.1 Looking at the cryptocurrency price history, it's sometimes easy to spot a crypto winter because the downturn may come with a double-digit percentage drop in crypto values.
There have been several crypto winters in the past. For example, from late 2017 to December 2020, crypto prices fell and hovered far off from prior peak prices. However, in December 2020, prices exploded to record highs in a significant crypto bull market.
There are no widely accepted, specific guidelines for how far cryptocurrency prices must fall to be considered a crypto winter. But market leaders and influencers tend to agree publicly when one has begun, as was the case in early 2022.2
Due to the volatility of crypto markets, it's impossible to accurately predict future price changes. However, it's wise for crypto investors to be aware that crypto winters happen.
Though the stock market has shown a pattern of ebbs and flows, cryptocurrency has a far shorter history of just over a decade. It is possible that any crypto winter could go on forever. In a worst-case scenario for investors, a long-term cryptocurrency winter could lead to lower and lower asset values as they approach zero.
Cryptocurrencies and cryptocurrency exchanges operate under minimal financial regulations. Though several crypto companies have fallen in the crosshairs of regulators, the majority of them operate with little scrutiny. This sets the stage for fraud and scams that consumers should remain aware of, including the risk of losses when holding crypto over the long term.4
How Is Crypto Winter Different From a Bear Market? The term bear market commonly refers to a period when stocks are lower in value, often due to a mix of economic factors. Though a bear market and crypto winter can coincide, they are not necessarily correlated.
Stock prices are determined by market forces, and investors rely on fundamental and technical analysis strategies to determine target prices. With cryptocurrencies, valuation models are in their infancy. This can lead to a major disconnect between stocks and cryptocurrencies.
However, as the crypto winter that began in 2021 demonstrates, there's also a possibility that a down stock market can happen simultaneously with a down crypto market.
In a typical crypto winter, the majority of cryptocurrencies are affected. Though there's a possibility for exceptions, investors should plan on a market-wide downturn during crypto winter periods. It's impossible to predict accurately when a crypto winter will begin or end. Following cryptocurrency news and tracking activities among cryptocurrency communities on social media networks like Twitter, Reddit, and Discord can offer insights into investor sentiment and planned investments.
Some cryptocurrency skeptics argue that cryptocurrencies have no intrinsic value and will eventually fall to zero. On the other hand, crypto enthusiasts expect the crypto marketplace to grow and evolve into an essential part of the global economy. There's no guarantee as to which camp is right or if the answer falls somewhere in the middle. It's up to investors and buyers to determine the true value of digital assets.
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This material represents an opinionated assessment of the financial market environment based on assumptions and prevailing data at a specific point in time and is always subject to change at any time. No warranty of its accuracy is given. It is not intended to act as a forecast of future events, nor does it constitute any kind of a guarantee of any future results, events or outcomes.
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