Volatility in U.S. stocks intensified last week, with the S&P 500 already oscillating at more than 1 percent for four consecutive days, and the CME Syn.com Panic Index (VIX) returning to the 20 mark.
The recent continued volatility in technology stocks underscores the changing market sentiment, and the Fed's accelerated asset purchases and further tightening of policy signals are facing a severe test of the Omicron strain. The latest survey shows that the proportion of individual US investors who are optimistic about the short-term market outlook has fallen to a three-month low, and whether concerns about inflation and the epidemic in the coming week will once again drag the market into a period of turmoil.
The Fed may be caught in a dilemma
Last week, the Fed held its last interest rate meeting of the year, and similar to expectations, the Federal Open Market Committee (FOMC) decided to reduce asset purchases by $30 billion starting in January next year, and if all goes well, it will end the current round of asset purchases in March. At the same time, the dot plot shows that the Fed is expected to raise interest rates three times next year, which is significantly tougher than the September survey results. Hawkish commissioner and Fed governor Waller said on the 17th that in view of the "amazingly high" inflation data, the Fed should quickly start raising the benchmark interest rate target next year, and may raise interest rates in March.
Bob Schwartz, senior economist at Oxford Economics, said in an interview with First Financial Reporter that the Fed is shifting its policy focus to prices, the decision to reduce the code has been communicated with the outside world, and is withdrawing support for the economy at a faster pace as planned, "In the case of increased inflation concerns, the Fed has finally abandoned the 'temporary' inflation, and the upward revision of the Personal Consumption Expenditure Price Index (PCE) next year reflects its concern about inflation stickiness to a certain extent." He further noted that poor retail sales data in November illustrates that consumer purchasing power is being eroded.
In a bid to improve logistics efficiency, the U.S. government unveiled a plan last week to increase the number of truck drivers as soon as possible, making it easier for applicants to become certified in the coming months as part of a broader policy package to push to address supply chain bottlenecks. However, Schwartz believes that short-term prices are still difficult to substantively resolve. The Producer Price Index (PPI) reached a new high in November, with a year-on-year growth rate of 9.8%. Against the backdrop of continued high raw material prices, the inflationary pressures transmitted downstream are likely to continue at least into the first quarter of next year.
At the same time as the Fed's policy shift, the US Treasury market is signaling concerns about an economic slowdown. Benchmark 10-year Treasury yields briefly fell below the key level of 1.40%, and a decline in long-term Treasury yields usually means investors are worried about the economic outlook. The yield curve flattened as two-year Treasury yields were boosted by expectations of rate hikes, and spreads between 2- and 10-year Yields narrowed to their lowest levels this year.
Many institutions believe that the trend of US debt may be the result of the combined effect of factors such as the rebalancing demand for funds at the end of the year and the lack of liquidity before and after the holiday. At the same time, the impact of the rapid spread of the Olmikron strain on the health care systems of various countries has also raised questions about whether the Fed can tighten monetary policy in the face of limited global economic activity. Affected by the epidemic, the latest PMI index of manufacturing and service industries in major European and American economies in December fell slightly.
Schwartz told the first financial reporter that although the US economic momentum in the fourth quarter was strong, the impact of the epidemic on manufacturing and service industries began to appear, and the economy may have a brief winter, "The potential inflationary pressure and economic downside risks in the first quarter of next year will make the policy choices after the Fed ends the asset purchase program more delicate." ”
Schwartz believes that the direction of the epidemic will largely determine the future course of the Fed, if the impact of the Omilon strain is finally confirmed to be only short-term and controllable, then combined with the Fed's forecast judgment on the prospects of the labor market, next May will be an important time window for the first interest rate hike, assuming that the final rate hike is three, it may be raised once in the third quarter and the fourth quarter. Of course, he stressed that the Fed will closely assess the specific impact of the epidemic on the economy, and the discussion of interest rate hikes may be more complicated than ending asset purchases.
Retail investors are anxious about when the market will stabilize
The much-anticipated Fed rate meeting did not bring calm to the market at the end of the year, with the Fear Index (VIX) rebounding nearly 15% in the past week. As the US Treasury yield curve flattens, value stocks outperform momentum stocks represented by growth as a whole. This pattern has been common in markets this year, often during periods of investor fear that central banks will take tougher measures, such as the end of November.
The poor performance of many star technology stocks has also weighed on market sentiment. The semiconductor sector continued to slump, Nvidia fell 7.9% weekly, Musk continued to sell Tesla fell 8.3% week into a bear market, the market was once close to $3 trillion Apple rushed up and fell back to 4.7% in the week, the largest weekly decline since February this year, the weekly market value evaporated nearly $150 billion, Microsoft fell 5.5% weekly, the worst performance in nearly 14 months.
The first financial reporter noted that investors' expectations of the Fed's interest rate hike have not cooled down with the worsening of the epidemic. The CME's Fed Watch shows that the probability of a rate hike in May has risen to 65 percent. Jim Paulsen, chief investment strategist at Leuthold Group, said: "Investors are reducing their exposure to growth stocks as the Fed becomes more hawkish and interest rate hikes are rising. Institutional portfolio allocations need to be adjusted, and funding may shift to sectors that are less sensitive to inflation and interest rate trends. ”
Recent volatility in technology stocks has also hit the confidence of individual investors, and CBN has previously reported that retail investors bought growth stocks at a low price in early December and once received rich returns, but the volatility of the NASDAQ has increased significantly before and after the Fed meeting. According to the latest AAII sentiment survey, the percentage of investors who are bullish on the short-term outlook for the U.S. stock market fell to their lowest level in three months, while the Fear & Greed Index hit the panic zone.
Trading in the derivatives market continues to be active, and data provided by Charles Schwab to the first financial reporter shows that the trading volume of U.S. stock options in the first two weeks of December averaged 42.9 million per day, far higher than the level of 34.4 million in the same period last year. Randy Frederick, managing director of trading and derivatives at Charles Schwab, pointed out that long volatility funds are once again taking the initiative, indicating that there is still a potential demand for decline in the short-term market.
However, the departure of institutions from the market on the eve of the Fed's interest rate meeting may bring opportunities for market stabilization. Bank of America Merrill Lynch's latest monthly fund manager survey shows that institutional cash allocation rose to 5.1% in December from 4.4% previously, the highest level since May 2020. Bank of America Merrill Lynch said that as a reversal indicator, a large increase in cash may have triggered a tactical buy signal. Statistics show that after this situation, the return of global equities will be 4% in the next three months, and the six-month return will rise to 6.5%.