The Fed Tightens and Omicron Surges (December 17 Market Recap)
December 17 Market Recap – a double shot of bad news threw cold water all over the markets this week. The Fed moved rapidly to tighten the money supply against historically strong inflation data and a fifth wave of Covid in the form of the Omicron variant surged across the globe.
Indices
Dow 35,365 or (605) or (1.7%)
Nasdaq 15,630 or (461) or (2.9%)
S&P 4,620 (92) or (2.0%)
U.S. 10 Year Treasury Yield 1.408%, (8 bp) or (5.4%)
Inflation and the Fed
As perfect as last week was in terms of news and returns, this week saw the corollary. It was difficult to discern with which bad news the markets were most concerned. Was it the Producer Price index which printed a historically high number? Was it continuing jobless claims that printed another near record pandemic low, further reinforcing the perception of a very tight labor market? Was it the widely expected Federal Reserve decision which announced a doubling in the reduction of asset purchases, effectively ending the easy money program in March 2022, three months earlier than originally planned? If any of these were the causes of the market’s downfall this week, no one informed the bond markets. Inflation concerns and expectations that the Fed is going to raise rates sooner than expected should have pushed the longer end of the yield curve higher and yet the 10-year Treasury yield fell 5% this week.
Covid and Omicron
That seemed to indicate that the market’s real concern is Covid, the rapid increase in cases and the effects of Omicron on society and as such, the economy. As of yesterday, December 17, daily average cases in the U.S. hit 125,480, +20% over the last two weeks and more concerning, deaths are averaging 1,291 a day, up 15% over the same time period. At this time, and it is still extremely early with very limited data, it appears that while Omicron is 2-3 times more easily transmitted than Delta, that people fully vaccinated (and boosted) with either the Pfizer/BioNTech or Moderna vaccines are fairly well protected not necessarily against infection but against severe illness that causes hospitalization. (However, the data is not encouraging for those who have been vaccinated with the Johnson and Johnson vaccine nor that of AstraZeneca. Those vaccines have demonstrated zero efficacy against the Omicron variant.) If this data is confirmed over time, the markets will quickly discount this fifth wave of Covid, and the focus will return to the Fed and other economic data.
Next Week
The markets are closed on Friday in observance of the Christmas holiday. Investors will be carefully examining any and all Covid data, especially regarding hospitalizations and deaths. Thursday could also be a volatile day in front of the three-day holiday as it will be chock full of data: Initial Jobless Claims, Personal Consumption Expenditure (PCE), Personal Income, Consumer Spending, and Durable Goods Orders.
Happy Holidays and Merry Christmas!
Market Data Points Next Week
- Monday – Leading Economic Indicators.
- Tuesday – N/A
- Wednesday – Q3 GDP Revision, December Consumer Confidence
- Thursday – Initial Jobless Claims, Personal Income, Consumer Spending, Core Inflation, Durable Goods Orders.
- Friday – Markets closed in observance of Christmas.
December 17 Market Recap Trading…
Monday– Dow (320) to 35,650, Nasdaq (217) to 15,413, S&P (43) to 4,668.
- Markets traded down on fresh omicron fears and ahead of the Fed’s two-day meeting that begins tomorrow and ends on Wednesday with Fed Chairman Powell’s press briefing.
- Only four of the eleven S&P sectors traded higher today led by defensive sectors Real Estate, Utilities and Consumer Staples. Energy, Consumer Discretionary and Tech were the hardest hit sectors.
- The 10-year U.S. Treasury yield fell 7 bp to 1.417.
Tuesday – Dow (106) to 35,544, Nasdaq (175) to 15,237, S&P (34) to 4,634.
- The market continued its slide today as the Producer Price Index gave more evidence that inflation continues to exist at higher than optimal levels and that the Fed will react with accelerated tapering and perhaps even multiple rate hikes in 2022.
- November Producer Price Index printed a 9.6% year-on-year increase vs expectations of 9.2% and +0.8% vs a 0.6% increase last month.
- Ten of eleven S&P sectors traded down today led by Tech, Real Estate and Industrials. Financials were the only positive sector, trading up on raising interest rate expectations.
- The 10-year U.S. Treasury yield traded up 2.5 bp to 1.439%.
Wednesday – Dow +383 to 35,927 Nasdaq +327 to 15,565, S&P +75 to 4,709.
- Markets rejoiced over Fed Chair Powell’s comments that the Fed has finally recognized the stubbornness of the inflation data and will increase its rate of tapering in January. Purchases will be limited to $60 billion, down from December’s $90 billion and versus monthly purchases of $120 billion since the beginning of the pandemic. At that rate, the asset purchase program will terminate in March vs the previously expected date of June. Powell also noted that as many as three rate hikes could be in the cards for 2022.
- Ten of eleven S&P sectors traded higher with Tech, Healthcare and Utilities leading the advance.
- The 10-year U.S. Treasury yield traded up 2.8 bp to 1.457%.
Thursday – Dow (29) to 35,897, Nasdaq (385) to 15,180, S&P (41) to 4,668.
- The full impact of the Fed’s decision weighed heavily on tech stocks and the Nasdaq today as riskier bets in high growth names become even riskier as money grows more expensive.
- Adobe (ADBE) didn’t help the tech space either as it guided down next quarter’s expectations.
- Jobless claims came in at 206,000 vs expectations of 200,000 and last week’s upwardly revised print of 188,000.
- Eight of the eleven S&P sectors traded positively today, led by Financials, Materials and Energy.
- The 10-year U.S. Treasury yield traded down 1.5 bp to 1.431%.
Friday – Dow (532) to 35,365, Nasdaq (10) to 15,169, S&P (48) to 4,620.
- Fallout from increasing Covid cases hurt the market today. As of today, daily average cases in the U.S. hit 125,480, +20% over the last two weeks and deaths are averaging 1,291 a day, up 15% over the same time period.
- All eleven S&P sectors traded down today. Financials, Energy and Industrials were the worst performing sectors.
- The 10-year U.S. Treasury yield traded down slightly to 1.408%. Yields traded down this week as investors fled risk assets and bought bonds despite the Fed’s actions this week.
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