Market turmoil could be a holiday week theme as investors worry about omicron, Fed
Traders work on the floor of the New York Stock Exchange (NYSE) in New York, December 8, 2021.
Brendan McDermid | Reuters
Stocks could be volatile over the coming week, with low volume exaggerating movement back and forth ahead of the Christmas holidays.
The market has been in the air for the past week, with the Nasdaq falling about 2.9% since Monday and trailing other major averages on a weekly basis. Tech stocks have been at the center of major market swings, as investors reacted to the spread of the omicron Covid variant and the Federal Reserve’s hawkish turn.
“As we head into the last two weeks of the year, we know the volume is low and volatility can rise as well,” said Jeff Kleintop, chief global investment strategist at Charles Schwab. “There is the possibility of a Santa rally, but there is also the possibility that the lack of volume could lead to dramatic downward tipping as well.”
While December is generally positive for stocks, the traditional Santa Claus rally is the historically positive market performance that often occurs in the last five trading days of the year and the first two of January, according to Stock Trader’s Almanac. . As the saying goes, if Santa Claus doesn’t call, bears can come to Broad and Wall, the address of the New York Stock Exchange.
A thinner market towards the end of the year
So far, the S&P 500 is still up 1.4% for December, but is down almost 1.7% for the week. The general market index registered a gain of about 23% for the year.
“The Santa Claus rally this year is a little hard to call because the market has done very well so far. Building on that momentum is a bold call,” said Michael Arone, chief strategist of investments at State Street Global Advisors. “Volumes will go down, and that will likely lead to more volatility towards the end of the year. It wouldn’t surprise me if the markets end the year strong, but with the omicron variant and the Fed tightening, it looks like anxiety is at high levels. “
The strategists have not given up on the idea of a rally from late December to early January. However, with the selling pressure, it might be more difficult for seasonal year-end buyers to energize the market. Market weakness can also make it difficult to assess how stocks will trade in January.
“I think it will be difficult to get a real picture of the market – the light volume and the fact that there will be relatively little economic or business news. It will just be incremental news on omicron, ”Kleintop said.
He said last year’s earnings had been a catalyst for stocks, with companies surpassing estimates and raising their forecasts. This could reverse the trend in the next earnings season in mid-January, if stocks continue to fall.
“This time around we could get a lot of dividend increases. There is a lot of money out there,” he said. Kleintop said expectations were only for an 8% gain in company profits in 2022, and that could increase as companies appear to be managing their margins better than expected.
There are several economic publications to watch over the coming week. Markets will be most obsessed with personal consumption spending next Thursday, as the so-called PCE deflator is the Federal Reserve’s most closely watched inflation data. The report tracks the hot consumer price index for November, which rose 6.8% year over year.
Arone said the market would also watch the release of the Consumer Confidence Index next Wednesday for inflation expectations. The University of Michigan Consumer Confidence Index was released on Thursday.
Key real estate indicators are also released next week, with existing home sales on Wednesday and new home sales on Thursday. Durable goods also came out on Thursday.
The market is closed for the Christmas holidays on Friday.
Confusion in the bond market
As stocks skyrocketed, bond yields fell last week, especially after the Fed announced on December 15 that it would speed up the end of its bond purchases. The central bank also provided a new interest rate forecast which showed members were expecting up to three hikes next year, whereas previously they were not expecting any.
The Fed also removed the description of inflation as “transient” from its statement.
Bond yields move opposite to price, so the drop in rates surprised market professionals. It would have made sense to expect higher yields on the short end of the market, which is most influenced by Fed policy. For example, the 2-year Treasury yield was 0.64% on Friday afternoon, below the 0.67% level it was before the Fed news.
The benchmark 10-year yield was 1.44% before the Fed’s announcement. It had fallen to 1.37% on Friday morning and was around 1.41% in afternoon trading.
Yields initially rose slightly on Friday afternoon after Fed Governor Christopher Waller said the central bank could raise interest rates as early as March. Goldman Sachs economists had expected a hike in March, but most expected the Fed to wait until May or June as it ends its bond program in March.
“I think the fear of the omicron has scared people. In the long run it takes a toll,” said Michael Schumacher of Wells Fargo. “The front end doesn’t make a whole lot of sense. We just heard from the Fed… The front end should really take its marching orders from Powell.”
While the Fed and the Bank of England recently decided to tighten their policies, another economic superpower may be doing the opposite.
Schumacher and Kleintop said a positive surprise for the markets could come from China ahead of Monday’s trading.
“On Monday we will all be watching China with what it does with its prime rate. There is a chance it can lower it,” Kleintop said.
“If China wants to boost its economy, that would be a real boost to global growth,” he said.
What to do
Kleintop said investors should stay fully invested. He noted that due to the large rotations of market leadership this year, investors are expected to be more diverse.
“Every time we started to see a breakthrough with value, it was crushed by another virus outbreak. We should see growth stocks outperform here, as cases increase, but they haven’t reached. a new high relative to value since omicron’s announcement, “Kleintop said.
Kleintop noted that the tech sector is highly regarded, with its price-to-earnings ratios 10 points above the 20-year average. The global tech futures earnings price was 28.5 on Friday. He said this compares to the global energy sector, trading at a 12-month futures price-to-earnings ratio of 9.5, about nine points below its average.
“This is the biggest gap we’ve seen between the most promising growth and value sectors,” said Kleintop. “We haven’t seen technology reach a new high relative to energy since before omicron. Certainly the Fed is weighing on valuations as well as the idea that there will be less liquidity poured into these preferred stocks. “
Kleintop said he doesn’t see a big gain for the market in 2022, like this year, and investors should look overseas for better gains.
“We see a positive year for stocks, but nothing like this year,” he said. “There is potential outperformance from Europe and internationally next year, after underperforming.”
Calendar for the upcoming week
10:00 a.m. Leading indicators
8:30 a.m. third quarter GDP
10:00 am Consumer confidence
10:00 am Sales of existing homes
8:30 am Unemployment claims
8:30 am Durable goods
8:30 a.m. Personal income / expenses
8:30 a.m. PCE deflator
10:00 am Sales of new homes
10:00 am Consumer sentiment
Markets closed for Christmas holidays