The U.S. stock markets (and the whole world for that matter) have been pushed around in recent weeks due to a number of factors. First and foremost, we have the Federal Reserve discussing the path for taking away the uber-accommodative policies that they have held in place ever since March of 2020 – the real onset of the Covid-19 pandemic. The Fed has been purchasing $120 Billion of bonds ($40B mortgage backed, $80B U.S. Treasuries) on a monthly basis and they have kept overnight interest rates essentially zero. At this point, with inflation printing 7% higher from December 2020 to December 2021 (highest Dec. to Dec. reading since 1981,) the Fed is obligated to take its proverbial foot off of the gas. Asset prices have rocketed higher and with consumer prices starting to follow, the Fed must ease off the throttle. If you are a regular reader of our post you know that, in our opinion, this should have happened about eighteen months ago. But here we are – the Fed is going to abruptly stop purchases and has indicated that short-term interest rates are going to be heading higher. This, among other things, has stimulated some big volatility in the stock market. Take a look at the chart of the VIX which is a measure of this volatility…
So, the Fed announcing it will begin reeling in some of the excessive accommodation it has been providing to the economy/markets has stimulated volatility. To be fair, there are a number of other factors investors are trading off of including the sabre rattling that the Russians and Chinese are doing vs. Ukraine and Taiwan respectively. Also included to a minor degree may be “Little Rocket Man” in North Korea continuing to puff his chest out and launch larger and larger rockets. Regardless of why, the major indexes have all retreated more than 10% from the high print last year and are now in “correction” territory. Additionally, when you look under the hood, the “internals” of the market the situation is more concerning. There are a small number of stocks that have held the indexes from giving up much more ground. Even after a great rally late Friday afternoon, more than 65% of S&P 500 stocks are below their 50-day moving average. This is indicative of a market that is weaker than the major averages would let on. Does that mean that the bull market of stocks is over and we need to reel in the risk? Historical analysis from JPMorgan says differently and shows a consolidation within the bull market.
JPM technical analysis team compared the SPX and the US2/10 yield curve on a longer time horizon. They write; "market response to the initial removal of accommodative monetary policy in the last four economic cycles produced multi-month ranges with 10-15% peak-to-trough amplitudes. The current drop already covered that ground....current setback is similar to the 1983, 1994, 2004, and 2015 episodes, a consolidation within a bull market."
One thing we would note on top of JPM’s stock analysis is the lack of a real move in interest rates. The Federal Reserve has been buying U.S. Treasuries at a staggering clip for the last two years. Intuitively if that “bid under the market” goes away, you would think that bonds would really sell off and corresponding interest rates would be much higher. This would be a very concerning indicator that the bull market may be done and risk off would be the right course of action. That has not happened. We are not indicating that it won’t happen – but with ten-year interest rates still under 1.8% we aren’t concerned. But we have it on our radar…
Of course, that doesn’t include some of the other geopolitical factors that may influence the market adversely – but obviously no one has a crystal ball on how that will play out. Stay tuned as the next few weeks/months will be pivotal for the asset markets (stocks, bonds, commodities, real estate) to see how well they hold up to the Fed pulling some of the punch bowls away from the party!
Regards and good investing,