As your faithful METAR weather reporter, it’s my job to report the weather. I report weekly to try to separate the signal from the noise, the wiggles from the trend. That’s a short-term report.
It’s also my job to report a change in the season (trend), not just this week’s weather. I called “Hurricane Covid-19” in March 2020, one of my best calls. I think that the season is changing. This is a trend that will last through at least mid-2022 and maybe the whole year.
Stocks are off to their worst start of a year since 2016 as the central bank pulls back the enormous stimulus programs it began in the early months of the pandemic.
The charts show a distinct pattern of concurrent dropping stock and bond prices. Bullish percent is way down. VIX is rising. The percent of SP100 stocks above their 200 day Moving Average is plunging. Gold, silver and copper are all rising. The trade is risk-off as stocks and junk bonds are falling relative to Treasuries which are also falling but more slowly.
The Fear & Greed Index is in mild fear but stocks and market momentum are in Extreme Fear.
The Treasury yield curve is rising at all durations.
The NASDAQ index, which contains many interest-rate sensitive stocks, has been hit harder than the SPX which contains many dividend-yielding and relatively stable stocks.
https://www.wsj.com/articles/tech-rout-fueled-by-bond-market…
**Tech Rout Fueled by Bond-Market Turn**
**Rising yields, particularly on inflation-protected Treasurys, are often viewed as close indicators of borrowing costs for businesses and consumers**
**by Sam Goldfarb, The Wall Street Journal, Jan. 23, 2022**
**...**
**Shifts within the bond market are removing a key pillar of support for Wall Street’s more speculative bets, dragging down major stock indexes as investors flee everything from tech stocks to cryptocurrencies.**
**Spooked in large part by rising bond yields, investors continued to dump stocks last week, extending early-year losses that have taken many off guard with their speed and severity. Once again, tech shares were at the forefront. Selling also broadened to include sectors such as banking and energy, sending the S&P 500 to its worst stretch of declines since the onset of the Covid-19 pandemic....** [end quote]
I don’t buy into Mr. Goldfarb’s TIPS thesis. The Fed buys 25% of the relatively small TIPS market so their thumb is heavily on the scale. This is not a free-market rate. But I do agree with his thesis that bond market shifts are dragging down speculative bets.
The market rout is caused by the Fed’s well-publicized decision to counter high inflation by gradually reducing emergency monetary stimulus and raising the fed funds rate.
https://www.nytimes.com/2022/01/21/business/economy/stock-ma…
**The Markets Tremble as the Fed’s Lifeline Fades**
**By Jeff Sommer, The New York Times, Jan. 21, 2022**
**...**
**As the worst economic ravages of the pandemic appear to be waning, at least for now, the Fed is ushering in a return to higher interest rates. It is also beginning to withdraw some of the other forms of support that have kept stocks flying since it intervened to save desperately wounded financial markets back in early 2020...**
**Removing this support inevitably cools the markets as investors move money around, searching for assets that perform better when interest rates are high....Financial markets now expect the Fed to raise its key interest rate at least three times this year and to start to shrink its balance sheet as soon as this spring. ...** [end quote]
The season has changed. This is not a wiggle, but a strategic Fed change that will not be quickly reversed — unless Fed Chair Powell’s spine sags during the inevitable taper tantrum. (As it did in 2018 – but inflation wasn’t high then.)
The stocks that bubbled from free lending – “growth” stocks with no actual earnings, let alone dividends – will be hit harder than low-beta dividend-yielding value stocks.
The METAR for next week is a change of season to autumn and possibly winter. The daily temperatures may fluctuate, but the general direction is down. This may be gradual or it may pop the bubble, causing a sudden drop as in 2001. Last week’s drop is just the beginning.
https://www.multpl.com/shiller-pe
Wendy
https://stockcharts.com/freecharts/candleglance.html?VTI,$SP…
https://stockcharts.com/freecharts/candleglance.html?$IRX,$U…
https://stockcharts.com/freecharts/candleglance.html?$SPX,$U…
https://money.cnn.com/data/fear-and-greed/
https://stockcharts.com/freecharts/yieldcurve.php