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Is Covid Coming Back This Winter?


It was a big day for earnings but a lackluster morning session for bulls. Stocks fell slightly at the open today despite blowout earnings from some of the market’s top companies. Tech-stalwart Nvidia (NASDAQ: NVDA) reported far better-than-expected quarterly results alongside Macy’s (NYSE: M) and Kohl’s (NYSE: KSS). Forward guidance from the latter two indicated to some analysts that department stores may finally be making a longer-term comeback following years of disappointing performance.

Others, however, were quick to note that the recent surge in consumer spending may not last through Q4 now that the “stimmy checks” have been spent and unemployment relief has ended.

“Macy’s is bouncing back from a terrible 2020 and is, like many other retailers, taking advantage of very elevated levels of spending in the consumer economy,” said Neil Saunders, managing director of GlobalData, in a note.

“None of this takes away from the positive numbers, but it places an important context around the reasons for recent success.”

What’s more, lingering supply chain issues could limit revenue growth for retailers and department stores as the critical holiday season approaches.

Regardless, M and KSS shares rocketed higher this morning. So too did NVDA.

But the general market refused to budge due to continued bond volatility. Yesterday, yields initially spiked before tumbling below their recent highs. Economic uncertainty, high inflation, and the aforementioned supply chain problems all remain as persistent headwinds for bulls.

“Recent economic reports remain strong, but today’s stock market action highlights that it is already discounting another Covid cycle,” said Leuthold Group chief investment strategist Jim Paulsen.

“Concerns about Covid also caused the 10-year bond yield to decline for the first time in 6 days and kept downward pressure on commodity prices including another sizable drop in crude oil prices. If inflation keeps rising while another Covid surge again stalls real economic activity, we may find out how the stock market handles a pseudo-stagflationary episode.”

In September, NIAID director Dr. Anthony Fauci warned Americans that a “dark winter” would soon arrive unless the US reached a high vaccination rate. President Biden took it a step further, saying that a “very dark winter” was coming as well.

Yet in Ireland, where over 93% of the country’s eligible population is at least partially vaccinated, the government has reinstated a partial lockdown. A nationwide midnight curfew is going into effect in addition to new work-from-home guidelines. The Irish government fears a full lockdown will be necessary before Christmas.



Meanwhile, in Gibraltar, the most Covid-vaccinated region on earth, Christmas has been canceled – yes, canceled – due to surging Covid cases.

It was believed by many analysts that Covid peaked in the US in September. Now, that prediction seems far less accurate as case totals continue to erupt in different nations with far higher vaccination rates than the US.

Covid infections have already started to rise again stateside. Will bulls continue to buy into the teeth of a “dark winter?”



Today’s bond activity suggests they won’t. It also warns of a coming stagflationary shock to the financial system.

So, even though strong Q3 earnings and October retail sales provided some bullish encouragement, the data may also represent the US economy's “last hurrah” before another wave of Covid infections.

All while inflation continues to rise.
 
What a Powell Nomination Means for Stocks


President Biden’s made his pick. Jerome Powell is to remain Fed chairman for another term.

Bulls breathed a sigh of relief this morning as stocks rallied strongly in response.

“It appears markets are reacting positively to the continuity signal. Continuity will be key during this potentially tricky phase of the recovery where inflation is elevated and sticky, demand growth is strong but cooling and capital and labor supply is gradually rebounding,” explained Oxford Economics chief US economist Greg Daco.

By noon, however, the market gave up most of its initial gains. Tech shares were down while Dow components enjoyed a moderate lift. The S&P traded for a small gain.

It seems investors sobered up after stocks temporarily touched new highs. Last Friday was the November options expiration (OpEx) date.

This year, there have been plenty of post-OpEx rallies that followed pre-OpEx dips. Up until September, it was a fairly reliable trade – sell the week of OpEx, then buy immediately after.

Last month, though, there was no pre-OpEx correction. Stocks simply surged through expiration without looking back. September saw a steep selloff prior to expiration, but no rally emerged to close out the month.

Now, though, the S&P may be returning to its old ways. Stocks closed below the November high last week. Today, the market rallied post-OpEx.

But the enthusiasm quickly wore off as hawkish sentiment came crawling back. With Powell still in charge, at least one rate hike should occur sometime next year. Short-term, Powell retaining his seat provides stability, which the market initially loved. Longer-term bulls, on the other hand, were hoping that Lael “no hikes” Brainard would get the nod instead.

“I think this was largely expected by markets. Certainly, there were some conversations in markets over the last couple of weeks about Brainard potentially being elevated to the Fed chair position. But by and large, the expectation was for consistency,” said Erin Browne, Pimco managing director and portfolio manager.

“You may see a little bit of a rally on the back of this with the expectation that policy is going to remain in place and intact, and everything that’s been articulated already by the Fed is likely to continue into 2022 and beyond.”

Compared to Powell, Brainard is an “uber-dove.” It’s hard to imagine after almost two years of unprecedented quantitative easing (QE) under Powell’s guidance, but a Brainard nomination would have undoubtedly been a moderate-to-long-term bullish impulse.

Inflation expectations would’ve risen, too. But in today’s market, high inflation doesn’t really matter. Not when taken at face value, at least. Investors are likely approaching a scenario where stocks continuously rise (nominally) to keep pace with inflation.

But little-to-no real gains will be made.

We’re not there just yet because stocks are rising so quickly. It’s coming, though, and it could happen fast should demand wane further and true stagflation take hold in 2022. That trend may intensify in the future now that Brainard is clearly next in line for Fed chair.

That means when Powell’s second term is done, Brainard’s in. Probably around the same time the US economy is begging for low rates once more.
 
Did the Fed Just Lie About QE?


Stocks opened slightly lower this morning before tumbling further shortly before noon. Rising rates sparked the midday selling as tech shares endured most of the losses.

Fed Chairman Jerome Powell’s nomination – something that initially sent equities higher yesterday –has clearly had a negative impact on sentiment. Hawkish fears caused a bearish finish to the trading session prior.

Today, investors saw more of the same.

But plenty of analysts still believe that Powell’s nomination will prove to be a net positive for stocks, even after this morning’s spike in rates.

“With a Powell-led Fed, we expect the speed of the QE taper to follow the data, likely speeding up if inflation prints continue at the pace of the October print with interest rate hikes to shortly follow the taper (June at current pace). The market believes this action will keep the Fed in control of inflation,” wrote Aptus Capital Advisors portfolio manager John Luke Tyner in a note to clients.

“While the market is expecting a more hawkish response to current inflation, time will tell if it will be enough, as Powell is well established in the dovish camp of FOMC policy.”

Other analysts noted the difficult situation the Fed currently faces.

“Continuity at a time of such extraordinary uncertainty is certainly welcome news. We have extraordinary uncertainty because we’re pivoting from the phase of the cycle where the Fed had been shoring up the recovery from the pandemic-induced recession, and […] it did avoid a meltdown in financial markets,” said Diane Swonk, Grant Thornton chief economist.

“But now we’ve got very easy financial market conditions and we’re dealing with inflation. And having to pivot to dealing with inflation and tamp it down without derailing the recovery. That’s a very hard thing to pull off. We’ve not seen the Fed actually chase inflation down since the early 1980s.”

The 10-year Treasury yield is now within striking distance of its November high. However, Powell’s nomination alone didn’t cause it to rise today. Nor did inflation worries. Something odd happened with the Fed’s bond-buying programs that prompted the Fed to postpone its scheduled purchase of 7.5 to 30-year Treasury Inflation-Protected Securities, otherwise known as TIPS.

“Due to technical difficulties, today’s Treasury outright purchase operation - scheduled for 10:10 AM in the TIPS 7.5 to 30 year sector for up to $1.075 billion - is being rescheduled,” said the Federal Reserve Bank of New York.

“It is now scheduled to take place Wednesday, November 24, 2021 at 11:00 AM.”

The postponement provoked heavy TIPS selling today which sent rates higher. Equities dropped in response to the rising rates.

If it’s true that the purchases were postponed for a purely technical reason, then rates should snap lower tomorrow and equities will likely rebound. On the other hand, the “technical difficulties” may actually be a smokescreen to cover for a lack of bond market liquidity. If that’s the case, rates should jump higher while stocks get crunched.

Don’t forget that the Fed just started throttling quantitative easing (QE). After more than a year and a half of unprecedented dovishness, hiccups were bound to happen.

Today’s bond-buying misfire may be the first of many. And it may also be the kind of thing that knocks bulls down a peg or two as inflation continues to heat up.
 
What the Covid Resurgence Could Mean for Stocks


It was another wild trading session this morning as stocks opened significantly lower on the day. Treasury yields initially spiked, driving equities lower. The 10-year Treasury yield hit a 6-month high for a few moments.

But several hours later, yields were back down. Rate-sensitive tech shares gained, helping to lift the S&P. Dow components sat at a loss.

Despite this morning’s growth-led intraday reversal, however, many analysts still believe value shares will outperform in the coming months.

“It’s certainly a story of more rotation,” explained Rob Haworth, senior investment strategist at U.S. Bank Wealth Management.

“The market is now, with the Powell renomination, thinking this is a reopening story, which sets aside any of the risks or concerns we might have about rising Covid infection rates.”

Haworth’s comments were made prior to a surprise announcement from the Slovakian government, which is set to impose a 2-week lockdown on its citizens regardless of vaccine status. The country is experiencing the world’s fastest rise in infections when adjusted for population. Neighboring countries Hungary and the Czech Republic also saw record-setting increases in daily infections yesterday.

Last weekend, Austria entered a nationwide lockdown as well. Germany attempted to curb new infections also by placing additional restrictions on the unvaccinated.

Will these lockdowns really help to “set aside any of the risks or concerns” about a Covid resurgence? Not at all. Case totals are rising even in the United States.

​

Deaths are up, too. In fact, US Covid deaths this year have actually exceeded 2020’s total based on data from Johns Hopkins. It’s a bit surprising given that over 60% of the US population is fully vaccinated according to the CDC. 69% are at least partially vaccinated.

Yet deaths in 2021 are higher than before the US had access to Covid vaccines. Worse still is that we have another month to go before the year ends. If infections continue to accelerate stateside, deaths could surge through Christmas.

And for the most part, analysts didn’t think that Covid would make a comeback. They believed that vaccines, treatment methods, and social distancing would finally end the pandemic in the near future.

Now, it’s clear that Covid’s sticking around for at least a little while longer than expected.

Wall Street banks said last month that a new variant could spoil the fun in 2022, but none of them predicted a good, old-fashioned seasonal spike in cases. It’s already begun in Europe, and even in highly vaccinated countries.

What happens if the US experiences something similar?

It won’t be pretty for reopening-sensitive stocks. And though growth shares won’t get hurt as much, they also won’t enjoy a “pandemic reboot” by any means. The Fed’s committed to slowly whittling away at its bond-buying programs. Inflation is surging and at least one rate hike seems likely next year.

If Covid cases continue climbing, the Fed will be put in an even more difficult position. Remaining hawkish into the teeth of an infection resurgence could have dire economic consequences. Alternatively, going dovish could push inflation to dizzying heights.

We’ve talked for months about the Fed’s “damned if you do, damned if you don’t” predicament. Powell was facing a tough situation six months ago. Now, escaping unscathed will be darn near impossible.

Unless, of course, the world simply chooses to live with Covid rather than avoid it at all costs. But based on the new lockdowns out of Europe, that outcome seems highly unlikely if not completely out of the question.
 
Did Powell Just End the Bull Run?


Vindication.

That was the word on my mind this morning as I read the latest statement from Fed Chairman Jerome Powell. After over a year of insisting that high inflation was merely transitory, Powell finally said “uncle” today when he admitted that it was “time to retire the word transitory regarding inflation.”

Powell continued, adding that the “threat of persistently higher inflation has grown.”

Does that ring a bell to anyone?

We’ve been arguing that high inflation would be a longer-term problem ever since Powell and Treasury Secretary Janet Yellen claimed it wouldn’t.

Now, following month-after-month of sky-high inflation prints, Powell’s thrown in the towel. Yellen will probably capitulate also so as to provide the façade of a united front against runaway prices.

I’d be more than happy to take a victory lap on this considering how much Powell, Yellen, the White House, and mainstream financial media have repeatedly balked at the notion of persistently high inflation.

But it’s really nothing to feel good about. The fact that it took this long for the most powerful central bank in the world to finally “catch up” with rational investors should be seen as extremely demoralizing.

These are the same people who control the US’s financial future. And they got inflation completely wrong.

Even worse, it’s likely too late to course-correct without decimating the US economy. The market already shrieked at the notion of that this morning when Powell’s remarks initially hit the airwaves. Then, he followed up with a comment that shook bulls to their very core:

“At this point, the economy is very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases […] perhaps a few months sooner,” Powell said. “I expect that we will discuss that at our upcoming meeting.”

All three major indexes sunk in response. The dollar soared, applying additional pressure to equities while gouging crypto and precious metals. The Dow officially entered “free fall” territory, dragging the S&P below last Friday’s low. Only the Nasdaq Composite remains within striking distance of its recent highs despite also tumbling.

Analysts went into full panic mode as a result.

“We have to expect [...] that the scenarios, all scenarios, include discoveries of people in this country with Omicron and talk that the vaccines don’t work or if they did those who have had Covid have no immunity,” tweeted “Mad Money” host Jim Cramer.

“These all cause selling.”

Conversely, today’s news may be the last bearish gasp before another rally. The dip-buying has simply been too strong this year. That’s not to say stocks will touch new all-time highs in the coming weeks, though. They may have done so had Powell not come to his senses this morning.

Now, however, the taper timeline looks like it will shift forward. That’s delivered a veritable hammer blow to the market’s typically dependable seasonal trend. So, as we approach Christmas, beware of a fake “Santa rally” as dip-buyers flood back into stocks.

Traders who exit in time could make out like bandits with some short-term gains, of course. But for the buy-and-hold crowd, it’s arguably never been more dangerous to be a passive investor.
 
Was That a Black Friday Sale or Sell-Off?

By Mike ReillyNovember 30, 2021​

News that a new COVID-19 variant has surfaced in South Africa spooked global equity markets this past Friday causing a frenzied sell-off.

The question coming into Monday’s open was whether that sell-off was an overreaction and an opportunity – or the beginning of a much deeper, panic-driven sell-off.

My thinking was – if global markets continued to panic and sell-off and it’s discovered the new variant poses less risk than first thought, a major global rally could follow.

And as Monday’s trading session got underway, that’s exactly what we saw, as both the S&P 500 and broad sectors rebounded from Friday’s sell-off.

So, although it appears equity markets have calmed and selling pressures have subsided, at least temporarily, there is still the question of what data investors should keep an eye on for future clues as to the overall direction of the markets.

Let’s start with where investors shouldn’t look for market guidance.

Do yourself a favor – avoid searching media outlets looking for financial advice, which proved to be absolutely worthless during the height of the 2020 pandemic.

Seriously, gain clarity and sanity by stepping away from the financial news network programs. You’ll be glad you did.

Instead, investors should spend their time focusing on what Wall Street is doing with their money.

Follow the money – focus on price trends.

In a previous ADAPT Weekly article, I wrote about small-caps’ attempts to finally break out of a range that they’ve been stuck in since February.

They didn’t. The attempt failed with Friday’s sell-off, which given the circumstances, probably shouldn’t have come as a big surprise.



You see, when investors get nervous and head for the exits, it’s typically small-cap stocks that get sold first, while the established household names are held the longest.

As of Friday’s market close, small-caps found themselves back in familiar territory, trading at levels they’ve been stuck in since February.

So, if the risk-off trade were to accelerate, expect small-caps to continue to sell-off.

On the other hand, if Friday’s sell-off was a knee-jerk reaction to the covid news, then small-caps could make another run at a breakout – indicating risk-on is back.

That thesis is still valid as we move into the trading week.

One day doesn’t a rebound make. The media isn’t done with their newest headline and neither are the global equity markets.

Small-cap stocks are only a part of the narrative this week…

A lot of investors haven’t even noticed the relative weakness of small-caps this year because they focus so heavily on large-cap stocks – think Apple, Microsoft, Google, and Tesla.

Check out this chart of the S&P 500 (SPX). The two areas outlined have been important price levels in the past – and we say that price has memory.



The 4545-4500 level is going to be important. A break below that level, which is also the September high, would not be a good look for what’s to come. A move back to the 4700 level would show improved demand for large-cap stocks and reaffirm the risk-on thesis.

And what about the DOW? On a positive note, the Dow Jones Industrial Average held up pretty well in the face of Friday’s sell-off.



A hold above the 35000 level is the short-term line in the sand. A significant break below that level would indicate that even the biggest of the big are getting sold off – meaning risk-off is the prevailing theme.

So what’s the bond market telling us about stocks?

If stocks are getting sold off as part of the fear trade, that money is going somewhere. That somewhere is often a flight to the relative safety of Treasury Bonds…

That’s why we saw bond yields plunge on Friday. Bond prices rallied and the yield on the 10-Year Treasury moved sharply lower.



This is another area to watch over the coming days…

Will yields continue to fall as more and more investment capital flees the stock market in search of safer harbors or will the trend quickly reverse as money flows out of bonds and back to risk-on assets at what looks like bargain prices?

Well, Monday’s trading is a perfect example of what I mean… check out the same chart of TNX after Monday’s close.



That’s a huge reversal in yields… it says institutional money – the money we track here at Rowe Wealth Management – is moving out of the safety of the bond market and back to growth assets.

Will it stick or is it just a temporary reversal?

What are we seeing on the sector level is what investors like you should keep in mind.

All 11 stock sectors lost ground during Friday’s sell-off. But which sectors are performing best can give us insight into how the biggest investors in the world feel about risk.



Friday’s market action saw defensive sectors like Healthcare, Consumer Staples, and Utilities hold up better than the more risk-on growth sectors.

While the growth sectors, Consumer Discretionaries, Technology, and Energy suffered the biggest losses.

As markets opened yesterday morning the question was: Will defensive sectors continue to lead as this market reassesses the prospects of future growth – or will the growth sectors reemerge as the leaders?

Here’s what sector performance looked at Monday’s close.



Technology and Consumer Discretionary stocks lead the market higher. These are the risk-on stocks that are growth leaders.

Interestingly enough, Utilities caught a bid, rising 1.5% on the day. Although Utilities are more defensive in nature, the reason they may have jumped today was the move from bonds back to equities – utility stock dividends replacing bond yields.

So, there you have it, some important areas for you to review as you navigate this week’s markets.

These are the same price charts we’ll be keeping a close eye on to interpret what’s happening at both the index and sector level for any clear signs of a directional bias – risk-on versus risk-off.

So stay tuned for more, and remember…

Follow the price action and always trade based on what is happening, not what might happen.
 
well last night was not good so rebound or jumping falling cat?
I was actually surprised by the size of the fall in the US last night , was expecting more a stabilisation +-0.1 or 0.2 %;
obviously that anagram of moronic variant being milder and more contagious..(no surprise) could be objectively seen as a blessing so just narrative BS about the cause of the market fall.
so I am more incline to mark this as the beginning of a big fall than I was this weekend
As you point out: focussing on market fact.
will be manageable either way with my current exposure
 
Why the November Jobs Report Is "Fake News"


Stocks go up, stocks go down. Investors were treated to another wild intraday trading session as the market jumped higher at the open this morning before plunging several hours later. A weaker than expected November jobs report initially sent stocks higher, due to the effect it could potentially have on the Fed’s taper schedule.

Fed Chairman Jerome Powell indicated earlier in the week that the taper might accelerate in response to persistently high inflation. Bulls interpreted last month’s major jobs “miss” (revealed pre-market today) as something that could slow the taper instead.

Only 210,000 nonfarm payrolls were added in November vs. 573,000 expected. At face value, that’s a very weak report.

But the real jobs number was likely much higher last month. It’s just that it wasn't reported accurately due to the Bureau of Labor Statistics’ (BLS) flawed seasonal adjustment model, which is used to screen out seasonal labor swings. For example, during months of uncharacteristically bad weather, the BLS will apply its seasonal adjustment model to construction-related payrolls to smooth out any sudden drops in hires.

The same type of adjustment is made to holiday-related jobs when the Christmas shopping season approaches. Over the years, November has typically seen 200,000 to 300,000 new hires as companies look for help to deal with the surge in holiday spending. The BLS’s seasonal adjustment will remove those jobs from the reporting to offset the spike in temporary employment, which can obscure the job market’s general health.

It’s an approach that makes sense. But during the Covid pandemic, the BLS’s model was thrown completely out of whack. And it’s only grown worse as the economic recovery has stalled.

Case in point, the BLS adjusted November’s jobs number down by a record-setting 568,000 payrolls. The average November adjustment since 2011 has been just 277,000 jobs by comparison.

Even in 2008, following the start of the Global Financial Crisis, the BLS adjusted down November’s jobs number by 389,000. Still far less than this morning’s report.

Without including the -568,000 job adjustment, roughly 778,000 payrolls were added last month. Had the BLS applied its average adjustment of -277,000 jobs, we’d be looking at a post-adjustment gain of 501,000 jobs, just 72,000 jobs away from the consensus estimate.

Wall Street either hasn’t realized this or is simply choosing to ignore it in the face of accelerating inflation.

“The disappointing 210,000 gain in non-farm payrolls in November suggests the labor market recovery was faltering even before the potential impact of the new Omicron variant, possibly as a result of the rising infection rates in the Northeast and Midwest,” explained Andrew Hunter, senior U.S. economist at Capital Economics.

“Nevertheless, the Fed will still push ahead with its plans to accelerate the pace of its [quantitative easing] taper at this month’s [Federal Open Market Committee] meeting.”

Analysts from investment management firm SouthBay were among the few who correctly identified the reason for last month’s major jobs “miss.”

They said the BLS’s massive adjustment took away from the fact that it was “far from being a weak November” for hiring. In reality, it was a relatively strong report despite missing estimates. Next month, these numbers will improve greatly following the BLS's November revision.

And that, if anything, should only fan the hawkish flames as inflation continues to rise.
 
Interesting fact again?
Why these adjustments?
To get a smooth curves?
Economics should be able to do their own work,if your raw data is not raw,that is just noise being added.
Great post
 
Why the “Santa Rally” Might Not Happen


Following a brutal week of trading, stocks opened higher this morning before rising even further through noon. Dow components led the way, dragging the S&P upward while the Nasdaq Composite lagged.

Our commentary last week noted that the Covid Omicron variant may not be worth worrying about. Today, investors seemed to realize that. It’s true that the new variant is more infectious, but early cases have suggested that it produces far milder symptoms than other Covid strains. Because of this, Omicron could potentially crowd out Delta, leading to a less-lethal version of Covid.

Some analysts believe, however, last week’s losses had little to do with Covid headlines.

“Super-cap tech has been well bid on the expectation of ‘forever’ low rates and support,” said Sevens Report founder Tom Essaye.

“But, with the prospect of rates rising and this new Fed paradigm, we are seeing investors rotate out of tech and into sectors with better exposure to higher growth.”

Essaye continued, adding that the Fed’s recent remarks on inflation and the ongoing taper ultimately dented sentiment.

“Tech pulled the entire market lower. Essentially, we are seeing a sort of Taper Tantrum 2.0 as markets react to a more hawkish Fed and rotate into sectors with more positive exposure to rising rates.”

As of this morning, the tantrum seems to have calmed somewhat. But that doesn’t mean the bull market is back on just yet. The S&P, for example, still lingers near key support at 4,550. A failure to rebound off support over the next few trading sessions could doom the market to a deeper retracement, especially if rate hike expectations continue to rise.

“Any speculative growth portions of the market are the ones that are trading off the most and that’s perhaps due to accelerated Fed tapering and Fed rate increases,” said US Bank Wealth Management’s Tim Hainlin.

“If you raise interest rates that decreases the value of those long-term cash flows for those long-term growth companies or parts of the market that are dependent on them.”

But Hainlin believes that investors have gone overboard with pricing in a more aggressive rate hike next year.

“The long-term growth rate is challenged by factors that are changing — demographics, productivity and longer-term growth in the labor force — and drive the economy in the long-term,” he explained.

“We still think those are muted relative to history, so the idea that the Federal Reserve would raise rates up until up to a rate that we’ve historically seen — we think that it’s not likely to get up to that level.”

What Hainlin didn’t mention, though, was how “hot” inflation has gotten in recent months. Persistently higher inflation, not strong economic growth, caused Fed Chairman Jerome Powell to consider accelerating the Fed’s taper.

In addition, the Federal Open Market Committee (FOMC) is now clearly concerned that stagflation – low consumer demand, high inflation – could soon arrive. The FOMC will meet later this month (December 15th) to discuss monetary policy moving forward.

If traders get any indication that the FOMC is tilting hawkish, expect stocks to drop again, regardless of how the Omicron situation looks in the coming weeks.
 
Today’s “Big Story” That Most Investors Missed


Stocks fell this morning as investors continued to weigh Covid fears. With cases rising around the world, it’s clear that not only is Covid making a comeback, but that the new Omicron variant could throw a sizable “wrench” in the US’s post-pandemic recovery.

Despite producing milder symptoms, the Omicron variant is more infectious according to doctors who first discovered the new strain. This is likely a positive turn of events should Omicron replace Delta in the coming weeks as the dominant variant, as it would theoretically result in fewer hospitalizations.

To WHO director-general Tedros Adhanom Ghebreyesus, though, there’s nothing about Omicron that’s worth celebrating.

“Certain features of omicron, including its global spread and large number of mutations, suggest it could have a major impact on the course of the pandemic,” Tedros said.

But perhaps the most disheartening Omicron-related soundbite came from Pfizer CEO Albert Bourla, who said this morning that people may potentially need a fourth shot sooner than expected to fight Omicron.

“When we see real-world data, will determine if the omicron is well covered by the third dose and for how long,” Bourla observed.

“And the second point, I think we will need a fourth dose.”

Remember when you only needed one dose of the Pfizer vaccine to be considered vaccinated? Those days are long gone. And don’t forget that each additional dose is simply the same stuff being injected multiple times, intended for the original Covid that came out of Wuhan. We’ve already run through both the Alpha and Delta strains with no variant-targeted changes to the vaccine.

Next up is Omicron, and Pfizer thinks that people will need a fourth dose of the unaltered vaccine to beat it back.

Unsurprisingly, this news stole the mainstream financial headlines this morning as investors groaned at the idea of yet another booster. But in China, the birthplace of Covid, something far more sinister happened that flew completely under the radar:

Evergrande, China’s largest real estate developer, finally defaulted after months of grasping at solvency. We observed back when the Evergrande problems first started that a default seemed inevitable. It wasn’t a question of if Evergrande would go “belly up,” but when.

When arrived earlier today (at least partially) after ratings agency Fitch reported the company defaulted on offshore bonds. Now, Evergrande has been given “restricted default” status alongside Kaisa Group, another major Chinese property developer that also missed offshore payments.

It’s important to note that Evergrande has not declared bankruptcy yet. The company is still in operation. But that could change quickly as certain holders of US dollar-denominated notes (those who control at least 25% in aggregate) can now demand immediate payment on those debts. This is what happens after a company triggers an “event of default,” which according to Fitch, occurred when Evergrande missed coupon payments on two bonds at the end of a 30-day grace period on Monday.

Fitch reached out to Evergrande to see if the payments were made. Evergrande didn't respond, so Fitch assumed that the payments were missed. S&P, another major ratings agency, has yet to declare “selective default” (their version of restricted default), but the agency sees it as an inevitability following Fitch’s report.

For now, the damage has been limited to foreign bondholders, which means Chinese investors haven’t had to take a haircut. At least, not yet.

That’s probably coming, though, as bondholders attempt to claw some funds back. The short-term concern is identifying who the major offshore bondholders are and seeing what kind of damage could result from future defaults. Pensions may be at risk alongside cryptocurrencies, the latter of which is in danger because of Tether's sizable Evergrande commercial paper holdings, denoted in US dollars.

Longer-term, the Chinese real estate market could potentially crash after Evergrande and Kaisa are chopped up and restructured, either through existing enterprises or a more nationalized, state-owned structure. If Chinese real estate goes down, the Chinese economy would likely follow, whacking the West as well.

So, while today’s Covid headlines were certainly disappointing for bulls, Evergrande’s default really should have received the majority of this morning's coverage. It’s something that threatens to unravel the entire Chinese bond market, and eventually, virtually every other market as well.
 

The Market Is Sending Mixed Messages. But What Does It Mean to Investors?​

By Mike ReillyDecember 12, 2021


Investors have been holding their breath as the S&P 500, the DJIA, the NASDAQ, and even the Russell 2000 Small-Cap Index has moved from one extreme to the other over the last two weeks.

When markets sell-off and quickly rebound, investors often find themselves in one of two camps.

The first group is jumping back in with both feet…

Screaming “What an opportunity! Let’s buy!”

While the other group is much more reserved… waiting for the proverbial “other shoe” to drop.

This group in particular is discovering that maybe they can’t handle as much risk as they previously thought…

After the market tanked in 2020, investors panicked when the S&P 500 shed more than 30% in a matter of weeks. It was painful…

Fearing the worst, many investors sold what they could and hoped for the best.

Nobody knew what the first pandemic in over 100 years could bring.

But what most investors couldn’t see was market breadth improving after the March low, leading to an eventual spike in breadth…

Meaning more and more stocks were breaking new highs, indicating that we were in the early innings of a new bull cycle and a great buying opportunity.

You can see it here – the S&P 500 along with a breadth measurement, looking at the percentage of S&P 500 stocks making new highs over the previous 21 days.




The fact that more and more stocks were rising was a strong bullish signal, giving hesitant investors another shot at profits.

The market in 2021 however, has been characterized by corrective price action and generally weak market internals. Nothing like 2020.

Although what we’ve seen in 2021 is historically normal during year two of a bull market, it’s still frustrating… and sometimes scary.

We’ve seen sideways, choppy price behavior since February.

And from a breadth perspective, markets in 2021 haven’t come close to the highs we saw from breadth indicators of 2020.

That’s not necessarily the worst thing because market internals (breadth) often peak early on in a new cycle.

But what bullish investors don’t want to see is a meaningful deterioration in breadth.

And here’s where things get a little dicey right now…

During this most recent sell-off, markets have experienced some of the highest readings of new lows since the COVID crash.

So, we may have exactly what we don’t want to see!

Fewer and fewer stocks moving higher, with more and more moving lower.

Was that it for the bulls? Was that the last gasp?

Are the bears getting ready to take control, sending markets substantially lower?

We don’t know yet. I wish it were that easy, but it’s not black and white.

From a breadth perspective, we want to know if what we just experienced was what we’ll refer to as “fall day” – a day when we see a big spike in selling.

These “fall days” are associated with markets that have run out of steam, where the spike in new lows in breadth is often followed by a sell-off in the index soon after.

Take a look at this chart of the NYSE where you can see the new highs for the New York Stock Exchange looking back over the last few cycles.



The recent increase in new lows (yellow arrow) represents a clear change from what we’ve seen from stocks compared with what stocks have done over the previous 18 months. That’s important information.

This is by far the most significant amount of new lows since the first quarter of 2020.

It should also be noted that the current reading looks a lot like the “fall days” from 2014 and 2018.

In other words, it’s time to sit up and take notice.

Unfortunately, it’s only with hindsight can we know for sure if what we just witnessed was the beginning of the end for this bull run…

So now is the time for investors to remain vigilant, and on the lookout for further weakness.

One thing we do know for sure is that market tops and bottoms aren’t an event, they’re more of a process. And that’s good for you as an investor…

Because this process provides investors like you the opportunity to prepare for either occurrence.

All the technical data is great, it can paint a picture of markets under the surface, where it really happens…

But all that data is useless if you haven’t already considered what is arguably the most important aspect of your investment success – proper risk management.

Over my more than 30 years of experience, I have learned that most people think they can handle a lot more risk than they can.

And the only way most people figure it out is when the damage is already done.

If you don’t understand your “risk number” – the amount of volatility or loss you can comfortably withstand within your account…

AND you haven’t structured your portfolio to behave in a manner consistent with your propensity for risk…

You’ve already lost. It’s just a matter of time.

That’s why we utilize a risk assessment process at Rowe Wealth that’s designed to help investors consider real dollar and cents terms.

Because nobody feels percentages, right?

If I were to ask you, “How would you feel if your account fell by 15% next week?”…

It feels very different than if I asked you, “How would you feel if your account lost $175,000?”

See what I mean?

Our aim is to not just help you find your true tolerance for risk…

But to also look at your risk tolerance compared to the risk you’re actually taking in your portfolio.

You’d be surprised how often those two numbers don’t match!



The point of the exercise is for you to understand, well in advance of a market reversal, what you could expect to happen in your portfolio.

And given the uncertainty in today’s markets, wouldn’t you like to know what to expect?
 
Why Wednesday Could "Make or Break" Stocks


Stocks fell this morning as inflation expectations rose. With the December FOMC meeting approaching on Wednesday, many analysts expected that the major indexes would remain “coiled” until then.

Instead, equities sunk today while reopening-sensitive stocks endured the worst of the selling. American Airlines (NASDAQ: AAL) and Carnival Corp (NYSE: CCL) both dropped over 6%.

Drugmakers, on the other hand, rocketed higher in response to rising Covid Omicron variant fears. Moderna (NYSE: MRNA) and Pfizer (NYSE: PFE) climbed more than 5% through noon.

But most investors are focused on Wednesday, when the 2-day December FOMC meeting begins. Wall Street believes that Powell will reveal an accelerated taper in his post-meeting remarks, doubling the current reduction in monthly asset purchases from $15 billion to $30 billion.

“Concerns are plentiful [...] ranging from a market which recently rallied quickly back to record highs, to ongoing Covid concerns. But the elephant in the room today and perhaps for the next few days will be the Federal Reserve and just how hawkish a tone they adopt later this week,” explained Leuthold Group chief strategist Jim Paulsen.

“With the first Fed tightening imminently pending, investors are dumping anything but risk-off assets including defensive sectors within the stock market, large caps, bonds, and the safe-haven U.S. dollar. Until the Fed meeting and its press conference is over, investors should probably expect fears to keep pressure on the stock market.”

Goldman Sachs chief US equity strategist David Kostin thinks that the discounting has already begun.

"Both equity and fixed-income markets appear to be pricing the coming Fed tightening," Kostin said in a note.

"Historical experience suggest equity valuations are typically flat around the first Fed hike. Moreover, some of the longest duration and highest valuation stocks plunged during the past month, suggesting that equity market pricing of Fed tightening is also under way."

This morning’s correction worsened following the release of the New York Fed’s public short-term inflation expectations survey.

"Median inflation uncertainty — or the uncertainty expressed regarding future inflation outcomes — increased at both the short- and medium-term horizons, with both reaching new series highs," the survey revealed, as the median inflation expectation (for one year from now) rose to 6%.

Some analysts don’t think inflation concerns will keep equities down for long, though. Mark Haefele, chief investment officer of UBS Global Wealth Management, said as much in a recent commentary on stocks.

“We believe markets can continue to take a higher inflation reading in their stride, though additional volatility remains a risk,” Haefele said.

“With Fed policy staying relatively accommodative, the backdrop for equities is still positive, and we favor winners from global growth.”

The S&P hit a new closing high on Friday. Today, the index almost touched its Friday low. But stocks still look capable of hitting new highs again should the Fed’s monetary policy not shift too hawkish for comfort.

Similarly, another correction could easily follow in the event that Powell disappoints bulls. Regardless of what happens, though, a big move should result – either up or down – as sentiment continues to whipsaw in anticipation of the Fed’s revised taper and rate hike schedule.
 

Key Takeaways from Last Week’s Market​

By Mike ReillyDecember 15, 2021

A week ago, I warned investors that the week ahead would be an important one for stocks and risk assets in general. And therefore an important week for investors.

The direction stocks turned would tell us a lot about what to expect in the coming weeks and possibly spell the end of the current bull market.

This morning, during our team meeting, it was suggested I put out a quick summary of any new developments that investors should be aware of.

So let’s revisit a few important stats from a week ago and compare them to today, to see if we’ve had any meaningful improvement or further breakdown.

Last week I pointed to price levels on both the S&P 500 and the DJIA as important lines in the sand. The message was that stocks had to hold their first-half highs.

I said we wanted to see the S&P 500 hold above 4500 and the September highs. If 4500 didn’t hold, it looked bad for stocks.

I also pointed out the 34500 level on the Dow Jones Industrial Average and its springtime highs as an important line. A meaningful and sustained breakdown would be damaging to some of the biggest stocks in the market.

I then commented about the importance of Treasury yields and reminded investors to watch them. If yields in the 30-Year and 10-Year fell dramatically it was likely happening in an environment where stocks were under a lot of selling pressure.

Investors didn’t want to see the 30-Year yield fall below 1.75% and the 10 Year fall below 1.40%.
We didn’t want to see yields break below their respective trend lines.

So, what’s changed? Has anything changed? What does it mean to investors?

The short answer is yes, we’ve seen some changes and some improvements in these key levels.

Let’s start with the S&P 500 Index:



Not only did the 4500 level hold, but the S&P 500 rebounded to reach an all-time high.

But as a caveat, and a word of caution, I will remind investors, these new highs in the index are happening while we continue to see weakening support from stocks under the surface, meaning fewer stocks are participating in the index’s rise to all-time highs.

Either stocks get it in gear and start to move higher or the index catches down to what the majority of stocks are doing.

You can see the weakness in the chart below showing the Large-Cap S&P 500 index compared to the percentage of stocks making new 52-week highs down the cap scale.



The bottom line is that we haven’t seen such weak breadth since COVID showed up a year ago.

Next up is the Dow Jones Industrial Average:



In a week’s time, the DJIA held and advanced 1000 points, back to 35500.

The DJIA found support at a very logical level, at a key technical level – kudos to the Dow!

We can summarize equities by saying that buyers stepped in and defended some very important price levels.

However, everywhere we look, it’s messy.

Now for Treasury Yields…

We’ve seen some dramatic improvement with yields running back above our key levels.

The 30-year yield is back above 1.75%, sitting at 1.88% today. The 10-year yield is back above its key 1.40% mark and is at 1.49% today.



That’s important information and a sigh of relief for many investors – or I should say, bullish investors…

Because if yields continue to falter, that’s happening when market bulls are heading for the exits and looking for someplace safe to put their investment capital.

And what would that mean for this bull market?

There are many, many other indicators we’re watching closely throughout the week, but the equity indexes and bond yields are as important as any of them.

I’d like to sit here and tell everyone the clouds are parting and it’s all systems go for stocks. But we’re just not there – yet.

It’s too early for the bulls to either claim victory or concede defeat…

So we’ll have to wait, watch and adjust to whatever the markets send our way.

It’s always a matter of weighing the evidence – and that means tracking data over time looking for emerging trends.

I will say that if a few of our key indicators continue to show improvement over the next few weeks, it could signal a strong opportunity on the horizon, but for now, it looks more like what we saw all summer….
 
1 Big Reason Stocks Could Rally Again


Stocks traded flat this morning following yesterday’s major surge into the close, which came immediately after Fed Chairman Jerome Powell’s post-FOMC meeting remarks.

Over the last few days, bulls were clearly worried that Powell would shift more hawkish than expected. And though the Fed did make a hawkish pivot, Powell left the door open for continued dovishness at the same time.

"Economic developments and changes in the outlook warrant this evolution of monetary policy, which will continue to provide appropriate support for the economy,” the Fed chairman said in his afternoon press conference, revealing an accelerated taper ($30 billion per month) and seven total rate hikes over the next three years, with three coming up in 2022.

That’s a large number of hikes, and coincidentally, exactly what Goldman Sachs predicted last week. Most Wall Street banks expected fewer hikes by comparison.

But still, stocks rallied in response to Powell’s comments, which provided a dovish spin on what could have been received as a highly bearish impulse.

“While the three rate hikes for ’22 projected by the dot plot likely raised more than a few eyebrows, keep in mind that would still keep us within the realm of historically low rates, and further the market often moves positively when it has a clearer picture of the future, which the Fed no doubt provided,” explained E-Trade strategist Mike Loewengart.

Other analysts agreed.

“I think what the market was looking for more than anything was certainty [...] It got that yesterday. There was a lot of bearish sentiment that was building up in the market,” said Mercer Advisors’ Don Calgani before adding that the Omicron variant could serve as Powell’s “get out of jail free card” if the Fed needs to shift dovish once more.

And that’s really what sent stocks higher yesterday, the idea that the Fed’s rate hike schedule is by no means set in stone. Investors not only know that, but they may not even believe that the Fed will actually hike rates when the time comes.

The Fed’s first rate hike is scheduled for May 2022, a point at which Powell thinks the US will have achieved significant economic progress alongside a much lower unemployment figure.

But will the US economy actually meet Powell’s goals? Probably not. Don’t forget that both Powell and Treasury Secretary Janet Yellen were completely wrong about inflation. For months, they argued that it was merely “transitory.”

Then, in late November, Powell chose to officially retire the term "transitory," opting instead to describe inflation as “persistent."

The November Producer Price Index (PPI) confirmed that to be the case several days ago when it came in far hotter than expected, rising 9.6% year-over-year vs. the +9.2% consensus estimate.

So, don’t expect Powell to be right about how the US economy will look in May of next year. Nobody has a crystal ball, not even the reigning Fed chairman.

Stocks may be stalling today, but make no mistake: a “Santa rally” is coming if the S&P can take out its all-time highs before Christmas.

Which, with a hawkish-but-also-dovish Powell directing traffic, seems like an inevitability at this point.
 
5 Stocks That Will "Beat the Market"


Stocks fell this morning as the post-FOMC meeting hangover continued. Rising Omicron variant infections and a blockbuster producer inflation reading out of Europe didn’t help matters, either. Germany just revealed an eye-popping +19.2% year-over-year rise in its Producer Price Index, blowing away analyst estimates. And as of today, the market (as represented by the S&P) has now given up all of its Wednesday gains, driven by Powell’s hawkish-yet-still-dovish afternoon press conference.

“As the Federal Reserve turns more hawkish and expectations for higher interest rates rise, investors are lowering exposure to growth stocks,” said Leuthold Group chief strategist Jim Paulsen.

“Typically, growth stocks exhibit a higher duration compared to value stocks because a higher proportion of their cash flows will be received in the more distant future.”

Growth stocks – i.e., the tech sector – certainly received the brunt of the bearish punishment this morning. The tech-heavy Nasdaq Composite led the market lower as a result of big plunges in major semiconductor names (NVDA, MRVL) and other market-leading tech shares (AAPL, MSFT).

For traders, the recent volatility has been utterly frustrating regardless of discipline. Fundamental analysts were left scratching their heads on Wednesday as stocks soared following the Fed’s hawkish pivot. Today, they’re trying to make sense of a sudden reversal.

Technical analysts, who base their trades entirely on charted price action, have similarly been whipsawed in both directions in response to a number of “head fake” moves from the major indexes.

In situations like these, the seasonal tendency has a knack for eventually taking over. “Santa rallies” have been the norm in December. This year probably won’t be any different despite the recent uncertainty.

But, as FSI Investments chief market strategist Troy Gayeski observed, investors may have to get a little more selective if they want to enjoy their milk and cookies come Christmas.

"The thing investors have to understand is, we're going through a major transition in monetary policy," Gayeski explained this morning.

"The Fed has been running emergency policies arguably far longer than they should have been, and as that money supply growth slows down as they ease off the balance sheet expansion and ultimately hike next year, one would at least expect more volatility in markets. And that's really what we've been seeing the last month."

He continued, adding:

"The biggest difference between now and six months ago, or even more than a year ago, is you could pretty much go long anything and you were confident it was going to go up. The economy was booming, we had a lot of fiscal stimulus, we still had unprecedented monetary policy stimulus. And it's a very different environment in 2022 where you're going to have to pick and choose much more carefully."

Market breadth, which was already narrow a year ago, has grown even narrower since then. The market’s top 5 tech names – AAPL, MSFT, NVDA, TSLA, GOOGL – have contributed to a whopping 51% of the S&P’s returns since April. These are likely going to be the same stocks that push the S&P to new Santa rally highs if the seasonal trend holds up.

And though buying the market’s most popular stocks near their all-time highs might be a bitter pill to swallow (especially for technical traders), it also could be the easiest way to outperform the general market without going “bargain hunting” for smaller companies, the vast majority of which did markedly worse than the S&P this year.
 

Is This Signaling a Cautionary Tale?​

By Mike ReillyDecember 21, 2021

There’s one ratio chart you don’t want to miss right now.

It’s one to focus on over the coming days and weeks ahead.

I’ve been saying this most of the year.

Don’t be fooled by what you think you see out of the cap-weighted S&P 500 index…

Most stocks are either grinding sideways or have recently failed at attempted breakouts.

The bulls can’t get it done.

Just look at the Small-Cap Stock Index.



After spending most of 2021 range-bound, small-caps finally broke out in late November, only to fail miserably in December.

And as the saying goes, “from failed moves, come fast moves in the other direction.”

But you didn’t need my help to see what happened with small-caps. So let’s dig deeper than what most investors can see on their own…

I’m going to give you a seat next to some of the world’s biggest mutual fund managers so you can see what they’re doing with their money right now.

All we have to do is look at what may be one of the most important Relative Strength ratio charts we’re monitoring today…

This ratio chart compares the strength of Consumer Discretionary (growth) stocks versus Consumer Staples (defensive) stocks.

Why is this chart you need to pay attention to?

Most mutual funds are mandated to stay fully invested. So, unlike individual investors, mutual funds can’t rush to the safety of cash if they’re worried about the current state of the market.

Mutual fund managers (the long-only community) only have two basic choices: Risk-On or Risk-Off.

Invest in growth stocks, which they’ll do when the economy supports growth – or invest in defensive stocks, which they’ll do when they’re worried the economy and stock markets are weak in the knees.

So by looking at this one ratio chart, investors, just like you, can see what some of the biggest fund managers in the business are thinking as they decide which direction to go, Risk-On or Risk-Off.

But before we take a peek, here are a few things you need to know:

  • Consumer Discretionary stocks include things like Autos, Retail, and Home Builders. These are all areas where consumers go to spend their discretionary income.
    • When Consumer Discretionary stocks are charging higher, this is normally happening in an environment of economic growth, so investors are willing to take on the additional risks associated with investing in growth stocks.
  • Consumer Staples stocks are things consumers will spend money on regardless of economic conditions. You’re still going to wash your clothes, brush your teeth, and eat and drink. Think of toothpaste, laundry detergent, food, and beer as staples…
    • When Consumer Staples is leading, it’s often a sign of economic weakness and Risk-Off behavior. It’s a sign people are tightening the proverbial belt on spending.
So which group is in charge today? Check the chart.




When the line in the ratio chart is rising, Consumer Discretionary stocks are outperforming staples. It’s Growth Stocks over Defensive Stocks.

And that’s a bullish signal for growth investors.

But see how the line peaked in October and November? Since peaking, the relationship moved sharply lower as Consumer Staples is outperforming discretionaries.

This means Risk-Off and defensive positioning by big investors.

But that doesn’t mean panic. Consumer Staples are still stocks.

We expect them to participate and rise in price during bull markets. But what we don’t want to see is Staples outperforming Discretionaries for any significant length of time.

And it’s starting to look like that’s what’s happening.

It’s still too early to call it over for Consumer Discretionaries or this bull market, but there are definitely signs of weakness you should be aware of.

This market is messy, it’s been messy since February. It’s range-bound – again.

Investors are going to have to be both patient and nimble until we get a definitive directional bias from market internals.

The Consumer Discretionary/Consumer Staples ratio chart is one of my favorites.

And right now it’s indicating investors should proceed with caution.

We’ll continue to pay close attention to the XLY/XLP ratio, looking for any hint of the direction of risk assets as we move into the last weeks of 2021.
 
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