The Grinch (The Fed) Steals the Santa Claus Rally (January 7 Market Recap)
January 7 Market Recap – Fed minutes spook the market, Treasuries sell off, yields soar, the Santa Claus rally suffers a huge hangover and earnings season kicks off.
Dow 36,231 or (104) or (0.29%)
Nasdaq 14,935 or (703) or (4.5%)
S&P 4,677 (85) or (1.8%)
U.S. 10 Year Treasury Yield 1.77% +25.6 bp or +16.9%
The Grinch (The Fed) Crushes the Santa Claus Rally.
After an average Santa Claus rally of 1.4% (the last 5 trading days of 2021 and the first two of 2022), the minutes from the last Federal Reserve meeting were released on Wednesday afternoon and provided a crushing blow to the markets and especially to highly valued growth stocks.
What Did the Fed Say?
The minutes indicated that not only is the Fed reducing asset purchases from $120 billion per month to zero by the end of March, but that they are actively discussing selling assets that they have purchased since the financial crisis in 2008 in an attempt to decrease their balance sheet from $8.67 trillion.
Why Does that Matter?
The Fed increases and decreases the money supply in an effort to fulfill their dual mandate: maximize employment while minimizing inflation. Since the financial crisis of 2008 and again starting with the Covid-19 crises in March 2020, the Fed has engaged in aggressively expanding the money supply which keeps interest rates low and thus makes it cheaper for businesses and consumers to borrow and buy. This keeps the economy humming and people employed. Since last month, the Fed has been decreasing the amount of money they are pumping into the system. Further, market observers are now expecting that the Fed will raise interest rates with three 0.25% hikes this year. The minutes released on Wednesday indicated that the Fed may use a third tool to tighten the money supply by starting to sell some part of the $8.67 trillion of assets it has purchased over the last 13 years. These actions have the effect of tightening the money supply which puts pressure on interest rates to move higher and makes borrowing more expensive. In short, it makes it harder for the economy to perform at a high level. Of course, the reason the Fed is considering these strategies is because they are more concerned with inflation than the strength of the economy at this time and feel that the economy has achieved full employment.
Omicron Infections and Hospitalizations Surging but Deaths are Flat.
Cases and hospitalizations have skyrocketed over the last two weeks as omicron becomes the dominant strain both at home and abroad. However, in an encouraging sign, deaths, while up 2%, are not up anywhere near as much as infections and hospitalizations. The next step is to see if the South African experience will occur here in the States with infections nose diving as quickly as they rose.
There will be plenty of inflection points next week. Fed Chair Jerome Powell will speak to Congress on Tuesday during his nomination hearing. On Wednesday, inflation data is released. Thursday sees jobless claims as well as the first two big earnings reports. Finally on Friday, the money center banks report to officially kick off Q4 earnings season.
Market Data Points Next Week
- Monday – N/A
- Tuesday – Fed Chair Jerome Powell nomination hearing before Congress.
- Wednesday – CPI, Core CPI.
- Thursday – Initial Jobless Claims, PPI. Two Fed Presidents speak. Earnings: Taiwan Semiconductor (TSM), Delta Airlines (DAL).
- Friday – Dec Retail Sales, Jan University of Michigan Consumer Sentiment (prelim). Earnings: JPMorgan (JPM), Wells Fargo (WFC), Citigroup (C) and BlackRock (BLK).
January 7 Market Recap Trading…
Monday– Dow +246 to 36,585 (record close), Nasdaq +187 to 15,832, S&P +30 to 4,796 (record close).
- All three indices continued the Santa Claus rally with one day to go. The Dow and S&P set new closing highs while Apple (AAPL) and Tesla (TSLA) pushed the Nasdaq to the day’s best performance, up 1.2% on the day.
- Despite the rally. only five of the eleven S&P sectors traded higher today led by Energy, Consumer Discretionary, and Financials.
- Apple (APPL) rallied 2.5% and briefly became the first $3 Trillion market cap company before closing just shy of the mark.
- Tesla (TSLA) announced Q4 and 2021 deliveries that crushed Street estimates. The stock soared 13.53%.
- The 10-year U.S. Treasury yield rose 9.2 bp to 1.64%!
Tuesday – Dow +214 to 36,799 (record close), Nasdaq (210) to 15,622, S&P (3) to 4,793.
- Higher treasury yields forced tech and other growth names to sell off while the re-opening trade sent the Dow to a new record close.
- For the second consecutive day only five of eleven S&P sectors traded higher today led by the same three sectors as yesterday: Energy, Tech, and Consumer Discretionary.
- November Job Openings and Labor Turnover Survey (JOLTS) showed improvement month over month with job openings declining to 10.6 million vs 11.1 million openings the month prior.
- November Job quits hit a new record at 4.5 million.
- The 10-year U.S. Treasury yield traded up 1.2 bp to 1.652%.
Wednesday – Dow (392) to 36,407, Nasdaq (522) to 15,100, S&P (92) to 4,700.
- Markets continued to sell off on the news that in addition to the Fed ending their asset purchase program in March and potentially raising rates shortly thereafter, that the central bank has also discussed reducing their balance sheet which in effect, would further tighten the money supply.
- All eleven S&P sectors traded lower with Real Estate, Tech, and Communication Services leading the sell off.
- The 10-year U.S. Treasury yield traded up 4.9 bp to 1.701%.
- One bright spot was the December ADP employment report which showed an increase of 807,000 jobs vs expectations of 375,000.
Thursday – Dow (170) to 36,236, Nasdaq (19) to 15,080, S&P (4) to 4,725.
- All three indices closed lower again today but the Nasdaq and S&P closed well off their lows while the Dow continued to sink into the closing bell.
- Jobless claims missed expectations at 207,000 vs 195,000 expected and last week’s slightly revised higher print of 200,000 claims. \
- Five of eleven S&P sectors traded higher, led by Energy, Financials, and Industrials.
- The 10-year U.S. Treasury yield traded up 3.1 bp to 1.732%.
Friday – Dow (5) to 36,231, Nasdaq (145) to 14,935, S&P (19) to 4,677.
- For the third consecutive day all three indices closed lower.
- December Non-Farm Payrolls missed expectations at 199,000 vs 422,000 and last month’s 249,000 print.
- The unemployment rate did beat expectations however, falling to 3.9% vs expectations of 4.1% and representing the lowest level since February 2020.
- Nine of eleven S&P sectors traded lower. The worst performing sectors were Consumer Discretionary, Utilities and Tech.
- The 10-year U.S. Treasury yield traded up another 4.5 bp to 1.77%.
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