Big market volatility is more normal than investors expect

Date:

The trader is working on the floor of the New York Stock Exchange (NYSE) in New York City on December 8, 2021.

Brendan MacDermid | Reuters

The stock market turmoil last week has been a moving roller coaster for investors, and the ride quality hasn’t stopped completely.

Feeling sick now, strategists say the market can get worse as it tries to find a floor. Overall, there weren’t many periods like this. Dow Jones Industrial Average swing Hurt 1,000 points in both directionsAnd stocks Move up and down A few percentage points a day.

But strategists say big moves are not uncommon when the index falls sharply. In this case, investors are adapting to the major changes caused by the Federal Reserve. Central banks are moving away from the simple policy of zero interest rates. This in turn has led investors to reassess the valuation of the entire stock market.

Sam Stovall, CFRA’s Chief Investment Strategist, said: The first hit stock was a high-priced name that benefited from low interest rates, and then sales spread to other growth and tech stocks before covering the entire market this month.

According to Bespoke S & P 500 Over the past week, there has been a daily range of at least 2.25% during the day. The main average ended at a high on Friday and wiped out losses that week after stopping another midnight reversal.

This week, Dow It was a 1.3% increase, the first positive week in four years. The S & P 500 rose 0.8% over the weekend to 4,431, with the Nasdaq Composite index flat.

S & P was 8% below record highs at the closing price on Friday and down 7% in January. Nasdaq is down 15% from its highests and down 12% this month.

Why the market is shaking

“That’s the point of these policies. In the first part of the business cycle, the Fed is easy and growth is recovering rapidly. Revenues are rising. Monetary policy is easy and unbelievable to sail. The wind is blowing, “said Barry Knapp, Research Director at Ironsides Macroeconomics. “That’s what we had last year, but the Fed wasn’t supposed to keep it that long, nor was it in any other business cycle. That’s why it caused a violent reaction. . “

last weekCentral banks made the market even more nervous When Federal Reserve Chairman Jerome Powell briefed the media. Powell acknowledged that the Fed could move even faster than expected for this year’s four rate hike markets.The futures market moved quickly Price for 5 hikes 2022.


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expensive, LowWhen close Average level of 30 Dow Jones Industrial Averages

Chart: Nate Ratner / CNBC

Source: FactSet. As of January 28, 2022.

img 61f49d1a52feb

expensive, LowWhen close Dow level

Jones Industrial Co., Ltd. 30 species average

Chart: Nate Ratner / CNBC

Source: FactSet. As of January 28, 2010.

img 61f49d1f2e72e

expensive, LowWhen close Average level of 30 Dow Jones Industrial Averages

Chart: Nate Ratner / CNBC

Source: FactSet. As of January 28, 2022.

Investors are also aware that earnings aren’t as strong as they used to be, said Michael Alone, chief investment strategist at State Street Global Advisors.

So far, 77% of companies have exceeded their fourth-quarter estimates, and Refinitiv reports revenues that are 4% higher than expected. This is well below the 16% average for the last four quarters, but in line with the long-term average.

“All this will result in increased market volatility until investors have exhausted this transition period,” Alone said. “On the other hand, the economy should continue to expand and earnings are pretty good. It’s enough to keep the market going, but I think it’s adapting to changes in monetary, fiscal and earnings.”

Investors have become even more nervous due to the volatile fluctuations as they were relatively calm last year.

According to Stovall, the average time to fall by more than 5% on the S & P 500 is 104 days, but in 2021 the S & P 500 was 293 calendar days and fell by more than 5% in September 2021. The market retreated by more than 5% between September and November 2020.

What’s behind the movement

Mr. Nap said large investors were using options and futures to hedge low volatility markets when the market was sluggish. The shift to a fast-moving market forces them to change their strategies, and that process is part of the reason for the huge upheaval of the stock market.

“When street makers and market makers are no longer in long-term short-term volatility, when they can’t afford to hold it because it’s too high, market makers are no longer there to mitigate the blow, and that’s it. It’s time to go wild, “he said.

Investors will eventually hedge a wider range of volatility and the market will settle, Nap said, but daytime movements are likely to remain higher than before.

Large fluctuations also correlate with transactions around key levels of the market, such as those related to moving averages. The S & P 500 fell below the 200-day moving average last Friday to prepare for a significant drop to 4,222 points on Monday. Although S & P has bounced back at that level, strategists still see it as an area where the market can be tested before the bottom is set.

The 200-day moving average is considered an important indicator of momentum. Below that for a period of time may indicate more downsides, and above that may indicate a larger rise.

“History is very clear in this regard. As we have done, confidently violating the 200-day moving average usually results in a significant plunge of 10% or 12%, regardless of the cause of the violation. It happens. 15%, this is what we got, “said Darrell Kronck, Chief Investment Officer of Wells Fargo’s Wealth and Investment Management.

Kronk said in an interview with CNBC that the market is probably set for a 4% to 7% rebound. “Often, that’s where the actual lows are set, which is 10% and 15% more,” Cronk said. “It happened in 2020. It happened in 2018. It happened in 2011. So in the short term it’s a bit here as investors may not yet have a low price for this kind of fix. I think we need to be careful. “

Kronk expects stocks to rise again this year, but investors now have to be cautious.

rate of up

A key indicator to watch, Stovall said, is the Treasury yield trend over a decade, which is a key benchmark influencing mortgage and other lending rates. On Friday afternoon, it was 1.78%, off the week’s highs. Yields also affect the investor’s view of stock valuation.

Stovall said the 10-year rise suggests that the S & P 500’s price-earnings ratio could decline.

Price earnings ratio is now 21x on a 12-month basis, down from 23.1% at the end of the year. This means that investors are paying 21 times last year’s earnings. When the stock price goes down, the price-earnings ratio goes down.

Stovall investigated what would happen if the 10-year yield was between 1.75% and 2.25%. He found that the high PE ratio during 2019 was 19.7%, but on average it is close to 16%.

“For us to go down from 23.1% to the upper limit of these observations, it means a decrease of almost 15%,” he said.

What to look for

Over the next week, investors will monitor key returns such as: alphabet, AmazonWhen Exxon Mobil. Bristol Myers Squibb When Merck To report Ford When General Motors..

There is also important economic data, the most important of which is Friday’s January Employment Report.

“It will be interesting to see if investors are celebrating bad economic news next week because of their impact on the Fed. Soon, some of these numbers will include the impact of Omicron,” Alone said. .. “We have data on manufacturing and services. We have a lot of labor data. As these weaken and begin to soften, the market will ease as some of the Fed’s tightening concerns are eased. Is it? “

Calendar one week ahead

Monday

Revenue: Cirrus LogicNXP Semiconductors, Helmerich & Payne, Cabot, Otis Worldwide, Ryanair

9:45 am Chicago PMI

11:30 am Mary Daly, President of the Federal Reserve Bank of San Francisco

12:40 pm Kansas City Fed President Esther George

2:00 pm Senior Loan Officer Survey

Tuesday

Revenue: alphabet, ExxonMobil, General Motors, UPS, Starbucks, Advanced Micro Devices, PayPal, Electronic Arts, Gilead Sciences, PutleGroup, SiriusXM, Chub, Stanley Black & Decker, Pitney Bowes, Scotts Miracle Gros, ManpowerGroup, Super Micro, PerkinElmer, Franklin Resources, Genworth, O-I Glass-Illinois, Ashland

Monthly vehicle sales

9:45 am Manufacturing PMI

ISM manufacturing at 10 am

Construction cost at 10 am

10am JOLTS

Wednesday

Revenue: Meta platform, Qualcomm, Novartis, DR Horton, Boston Scientific, Humana, Sony, AbbVie, Thermo Fisher, AmerisourceBergen, Capri Holdings, Marathon oilAvery Dennison, Johnson Controls, The New York Times, Waste Management, Fortune Brands, TrueBlue, Netgear, Qorvo, Cognizant Tech, Suncor Energy, McKesson, Aflac, MetLife, Allstate, Spotify, Emerson Electric, T-Mobile US, Spirit AeroSystems

8:15 am ADP Employment

10am 4th Quarter Residential Vacancy

Thursday

Revenue: Amazon, Merck, Honeywell, Ford, Eli Lilly, Royal Dutch Shell, Check Point Software, Becton Dickinson, Activision Blizzard, ConocoPhillips, Biogen, Intercontinental Exchange, Snap, Estee Lauder, Lazard, Cardinal healthDeckers Outdoor, Skechers, News Corp, Prudential FinancialClorox, Illinois Tool Works, Ralph Lauren, Hain Celestial, Synaptics, Quest Diagnostics, Cummins, Roche Holdings

8:30 am First unemployed bill

8:30 am Productivity and cost

9:45 am Service PMI

10am ISM service

Factory order at 10 am

Senate Bank, Housing, and Urban Issues Appointing Sarah Bloom Ruskin as Vice Chairman of Oversight at 10 AM

Friday

Revenue: Bristol Myers Squibb, Sanofi, Regeneron, Air Products, Aon, Eaton, CBOE Global Market

8:30 am Employment Report

Big market volatility is more normal than investors expect

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The post Big market volatility is more normal than investors expect appeared first on Eminetra.

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