Jerome Powell, Chairman of the Federal Reserve Board, speaks during a news conference following the Federal Open Market Committee meeting January 28-29 in Washington, DC on January 29, 2020.
Almond Ngan | AFP | Getty Images
Are you confused about what’s going on in the markets? Traders are safe.
“We were all comfortable that Covid was done or manageable, and it could still turn out to be the wild card,” said Peter Tchir of Academy Securities. “Nobody wants another year of lockdown.”
This week it looked like inflation / yield worries were replacing Covid as the primary market risk, and as a result, stocks have moved rapidly as investors tried to assess the impact of higher interest rates.
Finding that out is hard enough, but now we’re reminded of an uncomfortable truth: Covid didn’t go away.
“The Paris story wasn’t what the market wanted to hear,” said Steve Sosnick of Interactive Brokers, referring to the French capital, which was closed again amid concerns about new strains of the virus.
“The market wasn’t in the mood for more bad news,” he told me. “The bond market wasn’t particularly happy with [Fed Chair Jerome] Powell’s comments, and having one didn’t help you [quadruple witching] procedure [Friday]which likely resulted in more volatility. “
This uncomfortable truth – that Covid has not gone away – threatens a pillar of the market rally to new highs: the so-called reflation trade, in which companies are associated with the reopening of the US economy – transportation, travel / leisure, industry all spearheaded the market rally.
Some reopening stocks, especially energy stocks, have stalled this week on concerns about additional locks:
Shares reopened this week
- Exxon Mobil down 8%
- American Express down 4%
- Advices down by 2%
- Disney down 3%
While the broad reopening sectors are still on the upswing this week, by the middle of the week they are far from their highs:
This week’s reopening trade:
- Airlines (JETS) up 1.5%
- Homebuilders (XHB) are up 1.6%
- Cars (CARZ) increased by 1.5%
Value stocks are now momentum stocks – or are they?
The retreat was particularly baffling because value stocks (energy, industry, banks, some consumer names) that haven’t reached growth (technology) in a long time have suddenly stolen the limelight. Value stocks had become momentum leaders: the new high list was regularly filled with banking and industrial stocks.
Could another outbreak jeopardize the reopening sector’s profits? “Americans need to be reminded that we are not the world,” said Sosnick. “It’s not just Europe, things are falling apart in Brazil too. Americans are all thinking about their upcoming vacation, but the rest of the world may not.”
The market is confused about rate hikes
The biggest problem for the markets, however, is the right attitude towards higher rates.
“We cannot find out whether higher interest rates are okay for the markets or not,” said Jim Paulsen from Leuthold. “I still feel that at the end of the day, the mere growth numbers we will see will determine the day. The growth will be so strong that some inflation will not be that important.”
While the decline in big cap tech stocks has been relatively small this week, the hugely popular “thematic” tech sector (clean energy, games, cloud computing, cybersecurity, and Cathie Woods Ark Investments) has suffered greater damage throughout the week .
Thematic tech ETFs this week:
- Clean Energy (ICLN) down 11%
- Invesco Solar (TAN) down 11%
- Video Gaming (GAMR) down 7%
- Cloud Computing (WCLD) down 4%
- ARK Innovation (ARKK) down 5%
- 3D printing (PRNT) down 3%
“It seems like everything is speeding up.”
How can you understand all of this? Given the confusing fundamentals, is this crazy deal perfectly understandable, or does something else come into play?
One issue that has been raised repeatedly by the trading community is hyper-acceleration in retail – trends that used to take months to play out now play out in a matter of days or even hours.
This is not an illusion, said Seth Merrin, founder and executive chairman of Liquidnet, a global institutional trading network.
“GameStop is proof of the positive. Back in the dot-com craze, your porter gave you tips on stocks. Now everyone is sitting at home and watching Reddit. Putting money in Bitcoin, Dogecoin. That messes up the market. That is information . ” Professional traders hadn’t really looked at this. They can spark a firestorm in retail stocks that shifts trading in ways professional traders never even thought of, “he said.
The focus, Merrin said, is the fact that more people have access to data that was previously only available to experts. “The speed in retail isn’t the big differentiator, it’s access to data,” he said. “People can access, process and react to data. In the past, this data was only available to high-frequency traders. Now many more people can benefit from it.”
Where will this end? Will we all be high frequency traders in the near future? Do I have Artificial Intelligence trading my stocks interacting with your AI and my AI will be about as good as the best high frequency traders?
“Yes,” said Merrin. “Everyone in the world is not going to be a citadel, but since everyone is able to process more data, there is a chance they will get in and out of positions more.”
Paulsen also noted that the Covid crisis has also changed the way people see the world.
“If you look back on what happened in the pandemic, we had the biggest drop in GDP, the biggest job loss in history. And the Fed and Congress reacted with ferocity almost immediately. When the Fed and Congress suddenly responded accelerated time, why shouldn’t traders? “
Correction: Steve Sosnick is with Interactive Brokers. In an earlier version, the company name was identified incorrectly.
Subscribe to CNBC PRO for exclusive insights and analysis, as well as live business day programs from around the world.