Stocks Under Pressure Stocks began the week on a positive note, supported by a cooler-than-expected Consumer Price Index (CPI) report. Stocks reversed direction mid-week, however, following the Federal Open Market Committee (FOMC) meeting in which another 0.5% rate hike was announced. The half-point increase was widely anticipated, but the increase in the terminal rate (i.e., the point at which the Fed stops raising rates) rattled investors. Continued hawkishness by Fed Chair Powell at the post-meeting press conference added to investors’ anxiety. The potential for higher rates for longer, along with disappointing economic data, particularly a sharp decline in retail sales, amplified fears of a recession and sent stocks lower for the remainder of the week. |
Market Update1 |
ObservationsU.S. equities were negative across the board with the tech-heavy NASDAQ leading the way down for a second consecutive week, declining -2.70% WTD. Domestic stocks were down across the style box with mid-caps and small-caps also selling off, both returning -1.81%. Emerging markets and international stocks declined as well, with the MSCI EAFE and MSCI EM Indexes returning -2.13% and -2.10%, respectively. Bonds were slightly positive domestically and in the credit space, but down a few basis points globally; the Bloomberg Barclays U.S. Aggregate Bond index improved 0.80%. |
Major Options Expiry: Bulls reeling from the Federal Reserve’s still-hawkish tilt are about to lose a major force that helped tamp down turbulence in US stocks during this week’s macroeconomic drama. An estimated $4 trillion of options is expected to expire Friday in a monthly event that intends to add turbulence to the trading day. This time, with the S&P 500 stuck for weeks within 100 points of 4,000, the sheer volume provides a positioning reset that could turbocharge market moves. Given the brutal backdrop that emerged in recent days, from a raft of rate hikes by global central banks to signs the American economy is starting to flag, worries are mounting the expiration will act as an air pocket. That’s how David Reidy, founder of First Growth Capital LLC, sees it playing out. In his view, the market has been mired in a “long gamma” state where options dealers need to go against the prevailing trend, buying stocks when they fall and vice versa. Friday’s event “could break the tightness of the gamma exposure and lead to some dispersion, that is, room for the index to break out,” Reidy said. “That would be a downside move given yearend position adjustments and the macro recession view.”2 U.S. Scores $4 Billion Windfall on Oil-Reserve Sales: Volatile energy markets have made 2022 a big year for commodity traders. One of the biggest and perhaps most unlikely winners: The U.S. government. Emergency releases from the U.S. Strategic Petroleum Reserve are slated to end this month, concluding an unusual attempt to lower gas prices after Russia’s invasion of Ukraine sent oil prices soaring. Over the release period, Washington sold 180 million barrels of crude at an average of $96.25 apiece, well above the recent market price of $74.29—meaning the U.S., for now, is almost $4 billion ahead. The price of West Texas Intermediate to be delivered next month is down 40% from its wartime peak, reflecting concerns that China’s pandemic reopening isn’t juicing global demand. The question is whether the good news will last.3
1. Data obtained from Bloomberg as of 12/16/2022 2. Stocks Bulls Losing Support as $4 Trillion Options Set to Expire - Bloomberg 3. U.S. Scores $4 Billion Windfall on Oil-Reserve Sales - WSJ |
Economic Definitions Federal Reserve (the Fed): The Federal Reserve System is the central banking system of the United States of America. Building Permits: Tracks the number of permits that have been issues for new construction, additions to pre-existing structures or major renovations. These statistics are based on the number of construction permits approved. Housing Starts: Housing (or building) starts track the number of new housing units (or buildings) that have been started during the reference period. PCE (headline and core): PCE deflators (or personal consumption expenditure deflators) track overall price changes for goods and services purchased by consumers. Deflators are calculated by dividing the appropriate nominal series by the corresponding real series and multiplying by 100. CPI (headline and core): Consumer prices (CPI) are a measure of prices paid by consumers for a market basket of consumer goods and services. The yearly (or monthly) growth rates represent the inflation rate. University of Michigan Consumer Sentiment Index: Consumer confidence tracks sentiment among households or consumers. The results are based on surveys conducted among a random sample of households. Index Definitions S&P 500: The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. NASDAQ: The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971. Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928. Russell Mid-Cap: Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000 Index, which represent approximately 25% of the total market capitalization of the Russell 1000 Index. Russell 2000: The Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 8% of the Russell 3000 total market capitalization. The real-time value is calculated with a base value of 135.00 as of December 31, 1986. The end-of-day value is calculated with a base value of 100.00 as of December 29, 1978. MSCI EAFE: The MSCI EAFE Index is a free-float weighted equity index. The index was developed with a base value of 100 as of December 31, 1969. The MSCI EAFE region covers DM countries in Europe, Australasia, Israel, and the Far East. MSCI EM: The MSCI EM (Emerging Markets) Index is a free-float weighted equity index that captures large and mid-cap representation across Emerging Markets (EM) countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country. Bloomberg Barclays U.S. Agg Bond: The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency). Bloomberg Barclays High Yield Corp: The Bloomberg Barclays U.S. Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded. Bloomberg Barclays Global Agg: The Bloomberg Barclays Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. Bloomberg Barclays Municipal Bond Index: The Bloomberg Barclays U.S. Municipal Index covers the USD-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and prerefunded bonds. Disclosures The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. 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12/16 Market View Weekly: By the Numbers
December 20, 2022