January 24, 2022, was a banner day for the financial media.
Nothing generates reader interest like a selloff, and Bloomberg (among others) seized the opportunity. “The Market Has Never Plunged 10% This Fast To Start A Year,” one headline screamed, in something like 80-point font.
Stocks ultimately reversed course in the final hour. A manic rally off the lows helped equities close higher, but it was nevertheless a foreboding start to a critical week.
When the S&P dipped into correction territory, it was only natural that someone took a look back at history to determine if the benchmark had ever fallen this much during the first 16 sessions of a calendar year. It hadn’t (figure below).
In addition to geopolitical concerns, the notion that the Fed’s hands are tied (by inflation) exacerbated investor angst. The vaunted “Fed put” is now struck much lower.
“The Fed is serious about fighting inflation, and it’s unlikely that it will be turning dovish anytime soon given the seriousness of economic threats and the political support to take action,” Morgan Stanley’s Mike Wilson said, in the course of suggesting equities will likely log additional losses as US growth decelerates.
“Having the Fed put in place is like appending an insurance to stocks — their desirability and price should reflect it,” Deutsche Bank’s Aleksandar Kocic remarked. “Lowering the strike of the Fed put is equivalent to increasing the deductible of the insurance, mak[ing] stocks potentially more vulnerable, and their price should adjust lower.”
Their price is indeed adjusting lower. But financial conditions are still among the easiest in history, which means the Fed isn’t likely to rescue stocks unless and until losses are deep enough to impact the economy. Or until credit starts to buckle. CDX IG widened a seventh day Monday to the highest since November. High yield spreads were (and I emphasize “were”) well short of Omicron wides (figure below).
CNBC managed to get Jim Chanos on the record Monday to chide policymakers for their habit of rescuing stocks. “The idea of a Fed put and that the Fed is always going to be there to bail out bad investment decisions is really not cogent investment policy,” he told the network’s “Halftime Report” show. (And it is a show. No matter how old I get, I still chuckle at the titles of CNBC’s programming. We lampoon and deride Robinhood for their role in the gamification of markets while ignoring the Sportscenter-esque style of CNBC’s signature segments. They’ve been around so long we’re numb to it.)
Needless to say, Monday’s fireworks raised the stakes for Jerome Powell at Wednesday’s press conference. His first priority is conveying the Fed’s commitment to fighting inflation “because Main Street,” so the last thing he wants to do is suggest the Fed might pivot away from its newfound hawkishness “because Wall Street.” But the second-to-last thing he wants to do is exacerbate the stock rout, because if it goes too far (e.g., the S&P falls into a bear market just four weeks into the new calendar), the Fed will have to pay attention, lest the best laid plans for a March rate hike run up against a stock market crash.
“We estimate options imply a +/- 2.7% S&P 500 move on FOMC day vs. +/-0.6% realized moves over the past five years and a bar it has cleared just 1/75 meetings since 2013,” UBS’s Stuart Kaiser wrote. “That said, the S&P has traded down in six of the past eight FOMC weeks by an average of 1.5%.”
It’s entirely possible that the post-FOMC trade ends up being a relief rally for risk assets. After all, markets have priced in ~four rate hikes for 2022 and everyone now expects balance sheet runoff to begin sometime in the first half. And now, the S&P has corrected, Bitcoin is down 50% and the Nasdaq 100 is off 15%.
If a rebound is in the offing this week, it can’t come soon enough for some market participants. Monday’s losses were a bridge too far for the emotionally inclined (and for the highly leveraged).
Although the drawdown itself isn’t that large in the grand scheme of things (especially when considered in the context of the monumental, post-pandemic rally), the unrelenting character of the daily declines prompted a smattering of fatalistic soundbites, as scores of (nominal) adults rediscovered their inner six-year-old on the way to unleashing a torrent of petulant lamentations.
Commenting further during his CNBC cameo, Chanos called the assumption that the Fed “will bail out the stock market at some pre-determined level” a “very dangerous idea to uphold.”
H, did you read the article in WSJ about Marc Andreessen?
His reference to Sturgeon’s Revelation, which basically says that 90% of everything is crap, applies to the US media.
Of course, present company excepted.
The Fed put exists because when risk assets sell off versus risk free assets- that is basically the definition of tightening financial conditions. Conditions are clearly tightening. What i cannot understand is the commentariat and peanut gallery (I’m talking about the talking heads) being arrogant enough to suggest how far the Fed is behind neutral. NOBODY KNOWS. That is why central bankers (rightly) tend to make iterative policy changes. So the peanut gallery starts saying 4 hikes, balance sheet run-off and then GS ups the ante. You know, the Fed should stop increasing the size of the balance sheet and then get one rate increase. After that look around and see what is going on. With this economy 2 months is a lifetime. The Fed would be smart to get rid of the (stupid) dot plots, and start making policy with a private guess on amounts and timing and a healthy dose of humility. Then they can have a meeting and voila make a decision and do that each meeting for the next year. Its ok for them to clue in the public and peanut gallery after the decision(s). But don’t project out more than 2-3 months. Let the peanut gallery make their punts. They are mostly going to be wrong anyway. And not because they are foolish, arrogant or whatever. Its just that it is almost impossible to forecast these days more than a few months out.
Spot on, the arrogance is palpable and smacks of group think. It leads me to “yell” at my TV multiple times a day though I can’t stomach CNBC anymore, Bloomberg still has the taking idiots on all the time.
@RIA, I agree – seems to me the Fed has gotten itself into a straitjacket of promising to communicate policy moves well in advance, when it needs maximum flexibility to deal with events that no-one understands well (other than in hind-sight).
What an intraday reversal, but I’m skeptical that it holds.
The thing is, the system is working EXACTLY the way it should. Faced with a global pandemic, the Fed and other CBs flooded the global financial system with liquidity, thereby averting the worst financial slowdown since the 1930s. Once the advent of truly miraculous vaccines, in consort with a truly heroic public health response (and shame on the idiot anti-vaxxers who have made this way harder and more deadly than it needed to be), stabilized the system, it was inevitable that the absolutely necessary monetary and fiscal supports would be withdrawn. Gradually. Which is only now beginning to happen. For those who are looking at a 10% drop in the S&P — and a much steeper drop in highly speculatlive money-losing growth stocks — as the end of the world, get real. Markets go up, markets go down. You made a shit ton on the way up, you’ll lose some on the way down. That’s the nature of “investing.” Suck it up and look on the bright side: you get to gamble in the most liquid, transparent casino ever invented.
A “rebound” to what? A rebound, to introduce those that remain in the top of a TINA market to the new upper-bound, now that they ‘think’ they know what the new lower-bound is? The SP500 spelled out “V” today as pointed out in a pretty “V”acuous Bloomberg.com computer generated article featuring a table of recent dates with similar price moves. The Financial ‘journalist’ then cherry-picked data points to serve up a pattern and accompanying half-baked narrative. Guess which other periods since the dot.com bubble have a tendency to exhibit volatile “V” shaped days?
New game, new rules. Diversity dangerously deludes devotees dustbin destined. To late for rebalancing/reallocation tweaks, options hedging (to late/expensive? IDK, not my thing really since inflation was never high enough to make the ‘costs’ associated with cash painful before :^( ), for easy/cheap tail risk hedging. Not to late, by a long shot, for so-called “dumb” retail investors, to reach for the ancient tail risk hedging standby: cash. With the experienced retail investors bailing out with the dregs of their ‘fun’ money, and their less experienced brethren soon to follow, or be slaughtered in a range-bound (best hope for a soft-landing?) sideways-thresher soon enuff, it may be entertaining to watch the professionals try to make meals of each other.
Back in Sept 2020 Jesse Livermore 😉 wrote (read at osam.com or http://www.philosophicaleconomics.com/ ),
“In the end, TINA markets are guaranteed to be difficult and frustrating for large numbers of people. The problem of how to properly invest in them has no easy solution. Chasing ultra-expensive assets, nervously supervising them in the hopes that you haven’t top-ticked them, is stressful and unpleasant. But so is waiting on the sidelines earning negative real returns while everyone else makes money. Time is not on your side in that effort.
Returning to the subject of the current equity market, on the assumption that investors display zero sensitivity to valuation and invest entirely based on a pre-determined asset allocation preference, we can quantify the exact impact that the COVID-19 deficits would be expected to have on prices, if they found their way into markets [mostly they do, as he points out, injected money/liquidity flows ‘up’ to accumulate with those with a high propensity to save/invest (i.e., ‘rich’ owners)]. We simply assume that investors would bid up on the price of equity until their pre-pandemic allocation to equity was restored. To restore that allocation amid the COVID-19 debt issuance, the market would have to rise by roughly 18%, from its price at the time of the writing of this piece, roughly 3327, to a final price of roughly 3900, a forward 2-yr GAAP price-earnings ratio of 26 times.”
“3900”, why not? Could anyone here have come up with a better number back in 2020? Anyway, if you liked those words then you are in luck. There are another 40k of them at https://osam.com/Commentary/upside-down-markets Note the link to a podcast discussing the article, probably sparing listeners some of Jesse’s excruciating detail that readers will enjoy. JL does not have exact answers, but, ‘he’ sure as heck considered most of the relevant scenarios back in 2020.