Searching For A Narrative

US equities catapulted higher Tuesday, capping a mammoth two-day rally and putting the S&P on track for its second best week of 2021, no small feat considering how many stellar weeks this year boasted.

Big-cap tech surged 3%, the best single-session gain since March. Small-caps rose 2%. There was no respite from dizzying thematic swings. Profitless tech shares, the locus of pain amid Fed tightening concerns, jumped 6%, the most in some 20 months.

After falling into a technical correction, the FANG+ Index enjoyed a truly absurd two-day surge (figure below).

Apple had its best day in nine months. Tesla snapped its losing streak. And on and on. You get the idea.

So, what’s changed? Why the good vibes? Well, as noted here on Monday afternoon, I’d argue this is still much more noise than signal. As Nomura’s Charlie McElligott noted Tuesday while running through a list of remarkable statistics documenting the scope of recent deleveraging and exposure reductions from key investor cohorts, equities are trading short.

But, if you’re after a fundamental justification, you might cite early “evidence” (and the scare quotes are there to denote that it’s still far too soon to make definitive statements) that Omicron is less severe than its predecessors, even if it does have more potential to evade the vaccines. A lab experiment suggested the variant is indeed more clever at evading immunity conferred by the Pfizer shot.

Increasingly, strategists and commentators are inclined to echo Marko Kolanovic’s assessment. “Who would want to miss out on the possibility that a milder variant could accelerate natural immunity to COVID?”, one analyst wondered, in remarks to Bloomberg. Anthony Fauci’s cautiously constructive comments about Omicron’s severity helped bolster optimistic assessments.

Meanwhile, the US once again decided not to default. Mitch McConnell indicated Tuesday he won’t stand in the way of Democrats raising the debt ceiling. Or, actually, he indicated he’ll tacitly support a ridiculous legislative charade in the interest of not facilitating a financial calamity. The procedure is equal parts convoluted and inane, just like everything else that happens on Capitol Hill. As The New York Times explained,

The measure would create a special pathway — to be used only once, before mid-January — for the Senate to raise the debt limit by a specific amount with a simple majority vote, allowing Democrats to steer clear of a filibuster or other procedural hurdles so that Republicans would have no means to block it.

The proposal is wrapped into legislation that would postpone scheduled cuts to Medicare, farm aid and other mandatory spending programs that were set to kick in next year. Once that bill becomes law, Chuck Schumer would introduce separate legislation raising the debt limit. That is expected to pass with only Democratic votes in the 50-50 Senate, where Vice President Kamala Harris is empowered to break ties.

Bloomberg’s Billy House, Erik Wasson and Laura Litvan managed to capture the inherent absurdity better than the Times. “The maneuver involves a bit of procedural gimmickry,” they wrote. “The bill setting up the debt limit process would need 10 Republican votes in the Senate to advance, but does not itself raise the debt limit.”

If you’re wondering whether lawmakers think the above counts as a responsible way to handle an issue as delicate as a technical US default, John Thune has an answer for you. “We think this is a perfectly appropriate way to handle this,” he said Tuesday.

So, if you need to tell yourself a story to explain equity strength, you could cite early indications that Omicron isn’t particularly severe, another farcical debt ceiling “agreement” and the onset of what looks like an easing cycle in China.

That clears the way for market participants to worry about potential sanctions on Russia. Typically, investors ignore geopolitics unless China is involved, but there’s palpable concern around Vladimir Putin’s plans to invade Ukraine, a high-stakes gamble that I, for one, can’t imagine is worth the risk.

Oh, and Larry Summers now puts the odds of a US recession between now and the end of 2023 at between 30% and 40%. In remarks to the the Wall Street Journal‘s CEO Council Summit Tuesday, Summers mused that “engineering a soft landing is a very difficult thing to do” when the economy is growing rapidly and inflation is high.

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6 thoughts on “Searching For A Narrative

  1. Oh, well, I was feeling pretty good about things until you mentioned Larry S.’s comment at the end there. Now I have to go sit in the corner and worry for the rest of the evening. Thanks a lot, Walt…

    1. When? I am not impressed with his track record… though, I’ll concede he got inflation better than I post COVID so some respect is due there.

  2. Handling the debt ceiling without an 11th hour impasse would be good, as it will open a larger window for Santa to climb through.

    Russia invading Ukraine will be bad if it happens, not that markets care about Ukraine that much but retailatory cuts in NG to EU can’t be good except possibly for the energy complex.

    Otherwise, I struggle to see a fundamental narrative for today and would chalk it down to oversold stocks and options dynamics.

    The latest news on Omicron does not strike me as obviously bullish. It increasingly looks like 2x vaccine efficacy is significantly affected, and 3x (booster) may be affected as well. Lower severity is not clear, and if Omicron is 3x more transmissible than Delta, then 1/3x the severity implies no reduction in hospitalizations plus 3x the opportunity for more mutations. If convalescence from Delta provides little protection from Omicron, why should convalesence from Omicron be assumed to protect from whatever is next in the Greek alphabet?

    Still, the rally is good. It creates renewed opportunities to derisk.

    1. From the front page of Tuesday’s Portland (Maine) Press Herald: “The number of COVID-19 patients hospitalized in Maine jumped to a new high Monday, an apparent result of a post-Thanksgiving spike on top of the ongoing surged fueled by the more contagious delta variant of the disease.”

      Note they said DELTA variant, not Omicron.

      This in a state where 68.9% of the population is fully vaccinated.

      But, as a Wall Street trading legend once told us that before taking action, we should “Look at how the market reacts to news, not the news itself.” The futures reaction reaction to the headline that a lab study indicated that a triple dose of the Pfizer vaccine may neutralize the Omicron variant is a fine example of that.

      “We’re Happy as Clams, by a Sewer Pipe!”

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