Tag Archives: BX:TMUBMUSD10Y

Business

Fed’s Powell sparked a 1,000-point rout in the Dow. Here’s what investors should do next.

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Now might be the time to consider hiding out in short-dated Treasurys or corporate bonds and other defensive parts of the stock market.

On Friday, Federal Reserve Chairman Jerome Powell talked of a willingness to inflict “some pain” on households and businesses in an unusually blunt Jackson Hole speech that hinted at a 1970s-style inflation debacle, unless the central bank can rein in sizzling price gains running near the highest levels in four decades.

Read: Fed’s Powell says bringing down inflation will cause pain to households and businesses in Jackson Hole speech

Powell’s strident stance had strategists searching for the best possible plays that investors can make, which may include government notes, energy and financial stocks, and emerging-market assets.

The Fed chair’s willingness to essentially break parts of the U.S. economy to curb inflation “obviously benefits the front end” of the Treasury market, where rates are moving higher in conjunction with expectations for Fed rate hikes, said Daniel Tenengauzer, head of markets strategy for BNY Mellon in New York. 

To his point, the 2-year Treasury yield
TMUBMUSD02Y,
3.384%
hit its highest level since June 14 on Friday, at 3.391%, after Powell’s speech — reaching a level last seen when the S&P 500 officially entered a bear market.

Investors might consider making a play for the front end of credit markets, like commercial paper, and leveraged loans, which are floating-rate instruments — all of which take advantage of the “most clear direction in markets right now,” Tenengauzer said via phone. He’s also seeing demand for Latin American currencies and equities, considering central banks in that region are further along in their rate-hiking cycles than the Fed is and inflation is already starting to decline in countries like Brazil. 

A Fed battle cry

Powell’s speech was a moment reminiscent of Mario Draghi’s “do whatever it takes” battle cry a decade ago, when he pledged as then-president of the European Central Bank to preserve the euro during a full-blown sovereign-debt crisis in his region.

Attention now turns to next Friday’s nonfarm payroll report for August, which economists expect will show a 325,000 job gain following July’s unexpectedly red-hot 528,000 reading. Any nonfarm payrolls gain above 250,000 in August would add to the Fed’s case for further aggressive rate hikes, and even a 150,000 gain would be enough to generally keep rate hikes going, economists and investors said.

The labor market remains “out of balance” — in Powell’s words — with demand for workers outstripping supply. August’s jobs data will offer a peek into just how off kilter it still might be, which would reinforce the Fed’s No. 1 goal of bringing inflation down to 2%. Meanwhile, continued rate hikes risk tipping the U.S. economy into a recession and weakening the labor market, while narrowing the amount of time Fed officials may have to act forcefully, some say.

“It’s a really delicate balance and they’re operating in a window now because the labor market is strong and it’s pretty clear they should push as hard as they can” when it comes to higher interest rates, said Brendan Murphy, the North American head of global fixed income for Insight Investment, which manages $881 billion in assets.

“All else equal, a strong jobs market means they have to push harder, given the context of higher wages,” Murphy said via phone. “If the labor market starts to deteriorate, then the two parts of the Fed’s mandate will be at odds and it will be harder to hike aggressively if the labor market is weakening.”

Insight Investment has been underweight duration in bonds within the U.S. and other developed markets for some time, he said. The London-based firm also is taking on less interest-rate exposure, staying in yield-curve flattener trades, and selectively going overweight in European inflation markets, particularly Germany’s.

For Ben Emons, managing director of global macro strategy at Medley Global Advisors in New York, the best combination of plays that investors could take in response to Powell’s Jackson Hole speech are “to be offense in materials/energy/banks/select EM and defense in dividends/low vol stocks (think healthcare)/long the dollar.”

‘Tentative signs’

The depth of the Fed’s commitment to stand by its inflation-fighting campaign sank in on Friday: Dow industrials
DJIA,
-3.03%
sold off by 1,008.38 points for its largest decline since May, leaving it, along with the S&P 500
SPX,
-3.37%
and Nasdaq Composite
COMP,
-3.94%,
nursing weekly losses. The Treasury curve inverted more deeply, to as little as minus 41.4 basis points, as the 2-year yield rose to almost 3.4% and the 10-year rate
TMUBMUSD10Y,
3.042%
was little changed at 3.03%.

For now, both the inflation and employment sides of the Fed’s dual mandate “point to tighter policy,” according to senior U.S. economist Michael Pearce of Capital Economics. However, there are “tentative signs” the U.S. labor market is beginning to weaken, such as an increase in jobless claims relative to three and four months ago, he wrote in an email to MarketWatch. Policy makers “want to see the labor market weakening to help bring wage growth down to rates more consistent with the 2% inflation target, but not so much that it generates a deep recession.”

With an unemployment rate of 3.5% as of July, one of the lowest levels since the late 1960s, Fed officials still appear to have plenty of scope to push forward with their inflation battle. Indeed, Powell said the central bank’s “overarching” goal is to bring inflation back to its 2% target and that policy makers would stand by that task until it’s done. In addition, he said they’ll use their tools “forcefully” to bring that about, and the failure to restore price stability would involve greater pain.

Front-loading hikes

The idea that it be might be “wise” for policy makers to front-load rate hikes while they still can seems to be what’s motivating Fed officials like Neel Kashkari of the Minneapolis Fed and James Bullard of the St. Louis Fed, according to Derek Tang, an economist at Monetary Policy Analytics in Washington. 

On Thursday, Bullard told CNBC that, with the labor market strong, “it seems like a good time to get to the right neighborhood for the funds rate.” Kashkari, a former dove who’s now one of the Fed’s top hawks, said two days earlier that the central bank needs to push ahead with tighter policy until inflation is clearly moving down.

Luke Tilley, the Philadelphia-based chief economist for Wilmington Trust Investment Advisors, said the next nonfarm payroll report could come in either “high or low” and that still wouldn’t be the main factor behind Fed officials’ decision on the magnitude of rate hikes.

What really matters for the Fed is whether the labor market shows signs of loosening from its current tight conditions, Tilley said via phone. “The Fed would be perfectly fine with strong job growth as long as it means less pressure on wages, and what they want is to not have such a mismatch between supply and demand. Hiring is not the big deal, it’s the fact that there are so many job openings available for people. What they really want to see is some mix of weaker labor demand, a decline in job openings, stronger labor-force participation, and less pressure on wages.”

The week ahead

Friday’s August jobs report is the data highlight of the coming week. There are no major data releases on Monday. Tuesday brings the S&P Case-Shiller home price index for June, the August consumer confidence index, July data on job openings plus quits, and a speech by New York Fed President John Williams.

On Wednesday, Loretta Mester of the Cleveland Fed and Raphael Bostic of the Atlanta Fed speak; the Chicago manufacturing purchasing managers index is also released. The next day, weekly initial jobless claims, the S&P Global U.S. manufacturing PMI, the ISM manufacturing index, and July construction spending data are released, along with more remarks by Bostic. On Friday, July factory orders and a revision to core capital equipment orders are released.

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U.S. stocks push higher as Powell sees path back to 2% inflation while sustaining strong labor market

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U.S. stock indexes pushed higher after a wobbly start Wednesday, leaving Wall Street potentially on to gain ground after back-to-back losses, as investors tune in to remarks by central bankers while fretting that soaring inflation is damaging the world’s biggest economy.

How are stock indexes trading?
  • The Dow Jones Industrial Average
    DJIA,
    +0.12%
     was up 196 points, or 0.6%, at 31,143.
  • The S&P 500
    SPX,
    -0.23%
     traded up 15 points, or 0.4%, at 3,836.
  • The Nasdaq Composite
    COMP,
    -0.43%
    gained 42 points, or 0.4%, to 11,223.

On Tuesday, the Dow fell 491.27 points, or 1.6%. The S&P 500 fell 2% and the Nasdaq Composite dropped 3%. All three booked their worst daily percentage declines since June 16, according to Dow Jones Market Data.

What’s driving markets?

Federal Reserve Chair Jerome Powell said Wednesday at a European Central Bank forum on central banking that he sees a path back to 2% inflation while sustaining strong labor market, but warned there was “no guarantee that we can do that.”

Investors were also listening to remarks from European Central Bank President Christine Lagarde, Bank of England Gov. Andrew Bailey and Augustin Carstens, head of Bank for International Settlements, to speak at speak at the same conference.

On U.S. economic data, the first-quarter GDP was revised to show an 1.6% decline, compared with the prior 1.5% drop.

Equities were limping toward the end of a miserable first half of the year. The S&P 500 is down 19.6% so far in 2022, hit by concerns that inflation rates at multidecade highs are badly damaging household sentiment and that the Federal Reserve’s response to surging prices may tip the economy into recession.

Read: What’s next for the stock market after the worst 1st half since 1970? Here’s the history.

On Tuesday, the Conference Board’s consumer-confidence index dropped in June to a 16-month low of 98.7, with consumers’ outlook on the state of the economy at the most cautious in nearly 10 years. The news helped turn early gains for Wall Steet into heavy losses, with the Nasdaq Composite shedding 3%, leaving the tech-heavy index nursing a loss of 28% for the year to date.

“Last week, U.S. equity markets rallied on the back of the arcane logic that a U.S. recession would mean a lower terminal Fed funds rates and thus, was bullish for stocks… That premise was boosted by weak Michigan Consumer Sentiment data,” said Jeffrey Halley, senior market analyst at OANDA, in a note to clients.

See: Wall Street’s favorite stock sector has potential upside of 43% as we enter the second half of 2022

On Tuesday, “even weaker U.S. Conference Board Consumer Confidence data provoked the opposite reaction, with U.S. stocks plummeting,” he added.

Wall Steet’s dive left Asian and European bourses floundering. Hong Kong’s Hang Seng
HSI,
-1.88%
fell 2% and the Nikkei 225
NIK,
-0.91%
in Japan slipped 0.9%. China’s Shanghai Composite
SHCOMP,
-1.40%
shed 1.4% after President Xi Jinping reiterated that the regime’s strict COVID-19 policy was “correct and effective.”

The comments added to worries that supply constraints in China could exacerbate global inflationary pressures. And such concerns were illustrated in Spain on Wednesday, where data showed prices rising by 10.2% in June, their fastest pace in 37 years. Europe’s Stoxx 600
SXXP,
-0.41%
fell 0.8%.

Oil prices crept higher, with WTI crude
CL.1,
+1.61%,
up 1.5% to $113.41 a barrel.

The yield on the U.S. 10-year Treasury note
TMUBMUSD10Y,
3.135%
eased 1.3 basis points to 3.167%.

Companies in focus
  • Shares of Pinterest Inc.
    PINS,
    -2.36%
    rose 0.2% after the social-media company said co-founder Ben Silbermann is stepping down as chief executive and is being replaced by an e-commerce executive from Google.
  • Bed Bath & Beyond Inc.
    BBBY,
    -22.21%
    shares fell 18.7% after it announced disappointing fiscal first-quarter results and the ouster of its chief executive, Mark Tritton.
  • General Mills Inc.
    GIS,
    +5.31%
    shares rose 4.7% after beating quarterly expectations. The company posted fourth-quarter net income of $822.8 million, or $1.35 per share, nearly double $416.8 million, or 68 cents per share, last year. Adjusted EPS of $1.12, ahead of the FactSet consensus for $1.01 per share. 
Other assets
  • The ICE U.S. Dollar Index
    DXY,
    +0.30%
     edged down 0.01%.
  • Bitcoin
    BTCUSD,
    -1.04%
     fell 4.6% to trade near $20,120.
  • August gold futures
    GCQ22,
    -0.12%
    gained $6.30, or 0.4%, to settle at $1,827.90 an ounce.

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Business

Stock-market investors should watch this part of the yield curve for the ‘best leading indicator of trouble ahead’

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Investors have been watching the U.S. Treasury yield curve for inversions, a reliable predictor of past economic downturns.

They don’t always agree on which part of the curve is best to watch though.

“Yield curve inversion, and flatting, has been at the forefront for everyone,” said Pete Duffy, chief investment officer at Penn Capital Management Company, in Philadelphia, by phone.

“That’s because the Fed is so active and rates suddenly have gone up so quickly.”

An inversion of the yield curve happens when rates on longer bonds fall below those of shorter-term debt, a sign that investors think economic woes could lie ahead. Fears of an economic slowdown have been mounting as the Federal Reserve starts to tighten financial conditions while Russia’s Ukraine invasion threatens to keep key drivers of U.S. inflation high.

Lately, the attention has been on the 10-year Treasury yield
TMUBMUSD10Y,
2.478%
and shorter 2-year yield, where the spread fell to 13 basis points on Tuesday, up from a high of about 130 basis points five months ago.

Read: The yield curve is speeding toward inversion — here’s what investors need to know

But that’s not the only plot on the Treasury yield curve investors closely watch. The Treasury Department sells securities that mature in a range from a few days to 30 years, providing a lot of plots on the curve to follow.

“The focus has been on the 10s and 2s,” said Mark Heppenstall, chief investment officer at Penn Mutual Asset Management, in Horsham, Penn, a northern suburb of Philadelphia.

“I will hold out until the 10s to 3-month bills inverts before I turn too negative on the economic outlook,” he said, calling it “the best leading indicator of trouble ahead.”

Watch 10-year, 3-month

Instead of falling, that spread climbed in March, continuing its path higher since turning negative two years ago at the onset of the pandemic (see chart).

The 3-month to 10-year yield spread is climbing


Bloomberg data, Goelzer Investment Management

“The 3-month Treasury bill really tracks the Federal Reserve’s target rate,” said Gavin Stephens, director of portfolio management at Goelzer Investment Management in Indiana, by phone.

“So it gives you a more immediate picture of if the Federal Reserve has entered a restrictive state in terms of monetary policy and, thus, giving the possibility that economic growth is going to contract, which would be bad for stocks.”

Stocks were lower Friday, but with the S&P 500 index
SPX,
+0.51%
and the Nasdaq Composite Index
COMP,
-0.16%
still up about 1.2% on the week. The three major indexes were 4.5% to 10.1% lower so far in 2022, according to FactSet.

By watching the 10s and 2s
TMUBMUSD02Y,
2.280%
spread, “You are looking at the expectations of where Fed Reserve interest rate policy is going to be over a period of two years,” Stephens said. “So, effectively, it’s working with a lag.”

On average, from the time the 10s and 2s curve inverts, until “there’s a recession, it’s almost two years,” he said, predicting that with unemployment recently pegged around 3.8% that, “this curve is going to invert when the economy is really strong.”

The Federal Reserve Bank of San Francisco also called the 3-month
TMUBMUSD03M,
0.535%
and 10-year curve relationship its “preferred spread measure because it has the strongest predictive power for future recessions,” such as in 2019, back when the yield curve was more regularly flashing recession warning signs.

“Did it see COVID coming?” Duffy said, of earlier yield curve inversions.

A more likely catalyst was that investors already were on a recession watch, with the American economy in its longest expansion period on record.

“There are a number of these curves that you need to look at in totality,” Duffy said. “We’ve always said look at many signals.”

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The yield curve is speeding toward inversion — here’s what investors need to know

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The bond market’s most reliable gauge of the U.S. economic outlook for the past half-century is hurtling toward inversion at a faster pace than it has in recent decades, raising fresh worries about the economy’s prospects as the Federal Reserve begins to consider aggressively hiking interest rates.

The widely followed spread between 2-year
TMUBMUSD02Y,
2.170%
and 10-year Treasury yields
TMUBMUSD10Y,
2.384%
shrank to as little as 13 basis points on Tuesday, a day after Fed Chairman Jerome Powell opened the door to raising benchmark interest rates at more than a quarter percentage point at a time. Though slightly higher on the day as of Tuesday afternoon, the spread is down from as high as 130 basis points last October.

Investors pay close attention to the Treasury yield curve, or slope of market-based yields across maturities, because of its predictive strength. An inversion of the 2s/10s has signaled every recession for the past half-century. That’s true of the early 1980’s recession that followed former Fed Chairman Paul Volcker’s inflation-fighting effort, the early 2000’s downturn marked by the bursting of the dotcom bubble, the 9/11 terrorist attacks, and various corporate-accounting scandals, as well as the 2007-2009 Great Recession triggered by a global financial crisis, and the brief 2020 contraction fueled by the pandemic.

Inversions have already struck elsewhere along the U.S. Treasury curve, suggesting the dynamic is broadening out and could hit the 2s/10s soon. Spreads between the 3-, 5-, and 7-year Treasury yields versus the 10-year, along with the gap between 20-and 30-year yields, are all now below zero.

“The yield curve has the best track record within financial markets of predicting recessions,” said Ben Emons, managing director of global macro strategy
at Medley Global Advisors in New York. “But the psychology behind it is just as important: People begin to factor into their minds interest rates that are perhaps too restrictive for the economy and which could lead to a downturn.”

The following chart, compiled in February, shows how the 2s/10s inverted ahead of past recessions and has continued to flatten this year. The 2s/10s most recently inverted for a brief time in August and September of 2019, just months before a downturn sparked by COVID-19 hit in February to April of the following year.


Source: Clearnomics, Federal Reserve, Principal Global Investors. Data as of Feb. 9, 2022.

Ordinarily, the curve slopes upward when investors are optimistic about the prospects for economic growth and inflation because buyers of government debt typically demand higher yields in order to lend their money over longer periods of time.

The contrary is also true when it comes to a flattening or inverting curve: 10- and 30-year yields tend to fall, or rise at a slower pace, relative to shorter maturities when investors expect growth to cool off. This leads to shrinking spreads along the curve, which can then lead to spreads falling below zero in what’s known as an inversion.

An inverted curve can mean a period of poor returns for stocks and hits the profit margins of banks because they borrow cash at short-term rates, while lending at longer ones.

Though it slightly steepened on Tuesday, the 2s/10s spread is still flattening at a faster pace than it has at any time since the 1980’s and is also closer to zero than at similar points of time during past Fed rate-hike campaigns, according to Emons of Medley Global Advisors. Ordinarily, the curve doesn’t approach zero until rate hikes are well under way, he says.

The Fed delivered its first rate hike since 2018 on March 16, and is now preparing for a 50-basis-point move as soon as May, with Powell saying on Monday that there was “nothing” that would prevent such a move, though no decision had been made yet.

Some market participants are now factoring in a fed-funds rate target that might ultimately get above 3%, from a current level between 0.25% and 0.5%.

Meanwhile, Powell says the yield curve is just one of many things policy makers look at. He also cited Fed research that suggested that spreads between rates in the first 18 months of the curve — which are currently steepening — are a better place to look for “100%” of the curve’s explanatory power.


Sources: Bloomberg, Deutsche Bank

It’s the 2s/10s spread, though, that comes with a proven half-century track record. And it’s fair to say that whenever the spread is about to invert, observers have cast doubt on its predictive capabilities.

Read: Here are three times when the Fed denied the yield curve’s recession warnings, and was wrong (April 2019)

“Usually the yield curve is an excellent look into the not-so-distant future,” said Jim Vogel of FHN Financial. “Right now, however, there are so many things moving at the same time, that its accuracy and clarity have begun to be diminished.”

One factor is “terrible” Treasury market liquidity resulting from the Fed’s move away from quantitative easing, as well as Russia’s invasion of Ukraine, Vogel said via phone. “People are not necessarily thinking. They are reacting. People are not sure what to do, so they’re buying three-year maturities, for example, when typically people are more thoughtful about their choices. And those choices usually go into the accuracy of curve.”

He sees the spread between 3-year
TMUBMUSD03Y,
2.389%
and 10-year yields, which just inverted on Monday after Powell’s comments, as a better predictor than 2s/10s — and says that a sustained inversion of 3s/10s over one or two weeks would lead him to believe a recession is on the way.

On Tuesday, Treasurys continued to sell off sharply, pushing yields higher across the curve. The 10-year rate rose to 2.38%, while the 2-year yield advanced to 2.16%. Meanwhile, U.S. stocks recovered ground as all three major indexes
DJIA,
+0.74%

SPX,
+1.13%

COMP,
+1.95%
rose in afternoon trading.

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Mortgage rates fall amid geopolitical uncertainty. How the Russia-Ukraine crisis could impact home buyers — and interest rates

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Home buyers are seeing temporary relief from rising interest rates as markets react to Russia’s invasion of Ukraine. But in the longer term, inflation remains a serious concern.

The 30-year fixed-rate mortgage averaged 3.89% for the week ending Feb. 24, down three basis points from the previous week, Freddie Mac 
FMCC,
+1.59%
reported Thursday. The slight decline marks a retreat from the highest benchmark mortgage rates in years.

And there’s a chance rates will move even higher. As the U.S. and other countries move to impose sanctions on Russia over its invasion of Ukraine, gas prices are likely to surge due to Russia’s position as a major producer of oil and natural gas.

“An extended war in Eastern Europe could lead to higher global energy prices and higher U.S. inflation, forcing the Federal Reserve to tighten monetary policy aggressively, and higher interest rates could become a larger headwind for the U.S. economy,” said PNC chief economist Gus Faucher.

“Even with this week’s decline, mortgage rates have increased more than a full percent over the last six months,” Sam Khater, Freddie Mac’s chief economist, said in the report.

“‘An extended war in Eastern Europe could lead to higher global energy prices and higher U.S. inflation, forcing the Federal Reserve to tighten monetary policy aggressively.’”


— PNC chief economist Gus Faucher

The 15-year fixed-rate mortgage fell one basis point over the past week to an average of 3.14%. The 5-year Treasury-indexed adjustable-rate mortgage averaged 2.98%, unchanged from the previous week.

The decline in mortgage rates roughly tracks movements in long-term bond yields. The 10-year Treasury note’s yield
TMUBMUSD10Y,
1.968%
has slid in recent days as tensions in Eastern Europe exploded into armed conflict.

“As the world reacts to developments in Ukraine, the uncertainty will likely mean a pause in the recent pace of increases,” said Danielle Hale, chief economist at Realtor.com.

But even with this momentary pause, mortgage rates remain significantly higher than in recent months. According to Hale, only two previous events compare with this recent surge in rates. Following the 2016 presidential election, mortgage rates soared 85 basis points over 10 weeks, and in 2013 during the “taper tantrum” when the Federal Reserve scaled back its stimulus activities interest rates increased by more than 1% over 11 weeks’ time.

“In both cases, home sales momentum slowed in the following year due to the impact on affordability, since rising rates mean higher homeownership costs even if home prices are unchanged,” Hale said, noting the effects were more pronounced for those who had less money to put toward a down payment.

It remains to be seen whether a similar string of events will occur in 2022, though signs point in that direction. Recent mortgage-application data from the Mortgage Bankers Association suggests that home-buying demand has ebbed in the face of rising rates.

Bruce Kasman, JPMorgan’s chief economist, told CNBC that the Russian invasion of the Ukraine makes the Federal Reserve’s position more complicated. “There is a scenario where the growth hit starts to get more substantial. There’s also scenarios where the price increases are not as damaging to growth and it’s feeding inflation.”

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Is it time to bail out of the stock market? Wild price swings are shaking the resolve of some investors.

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Is it time to bail out of stocks and bonds? This isn’t the market that investors likely signed up for back in 2021 when shares in GameStop Corp.
GME,
+4.69%
and movie chain AMC Entertainment Holdings
AMC,
+3.72%
were headed to the moon, drawing in droves investing neophytes.

The meme-stock frenzy, the one underpinned by social-media chatter as opposed to fundamentals, has fizzled, at least for now. Highflying technology stocks that could change the course of the world have been under pressure, as benchmark bond yields turn up with the promise of a Federal Reserve that is closing the purse-strings of too-loose monetary policy.

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Economists and market participants are predicting three, four, maybe as many as seven interest-rate increases, of about a 0.25 percentage points each, this year to tackle inflationary pressures that have gotten out of hand.

Read: What to expect from markets in the next six weeks, before the Federal Reserve revamps its easy-money stance

The upshot is that borrowing costs for individuals and companies are going up and the cheap costs of funds that helped to fuel a protracted bull market is going away.

Those factors have contributed partly to one of the ugliest January declines in the history of the technology-heavy Nasdaq Composite Index
COMP,
+3.13%,
which is down nearly 12%, with a single session left in the month, leaving one final attempt to avoid its worst monthly decline since October of 2008, FactSet data show.

Check out: Is the market crashing? No. Here’s what’s happening to stocks, bonds as the Fed aims to end the days of easy money, analysts say

What’s an investor to do?

Jason Katz, senior portfolio manager at UBS Financial Services, says that he’s had an “increased volume of hand-holding calls” from his high-net worth clients.

Katz said he’s telling investors that “it’s not about exiting the market now but making sure you are properly allocated.”

“It’s not a systemic problem we have in [financial markets], it’s a rerating,” of assets that fueled a speculative boom.

“You had a whole constituency of investments that should have never traded to where they did,” Katz said, “Aspirational stocks, meme stocks…all fueled by fiscal and monetary stimulus and this year it is about a great rerating,” of those assets, he said.

Art Hogan, chief market strategist at National Securities Corporation, told MarketWatch that losses come with the territory of investing but investors tend to feel it more acutely when stocks go down.

“It is our nature to feel losses more sharply than we enjoy gains. That is why selloffs always seem much more painful than rallies feel pleasurable,” Hogan said.

It is always important to note the difference between investing and trading. Traders purchase assets for the short term, while investors tend to buy assets with specific goals and time horizons in mind. Traders need to know when to take their losses, and live to trade another day, but investors who usually have time on their side need to invoke different tactics.

That is not to say that investors shouldn’t also be adept enough to cut their losses when the narrative shifts but such decisions should hinge on a change in the overall thesis for owning assets.

Hogan said that investors considering bailing on markets now need to ask themselves a few questions if they are “afraid.”

“’Have my reasons, for investing changed?’”

“’Have my goals changed? Has my time horizon for the money changed?,’” he said.

“Most importantly, ask yourself the question: ‘Am I skillful enough to get back into the market after the average drawdown has occurred,’” he said. “They certainly, don’t ring a bell at the [stock market] bottom,” Hogan said.

Data from the Schwab Center for Financial Research, examining a group of hypothetical investors over a 20-year time period, also supports the idea that being out of stocks, and in cash, for example, is unlikely to outperform investing in equities, even if investors were badly timing the market.

“The best course of action for most of us is to create an appropriate plan and take action on that plan as soon as possible. It’s nearly impossible to accurately identify market bottoms on a regular basis,” according to findings from Schwab’s research.

To be sure, the market going forward is likely to be tough sledding for investors, with some speculating about the possibility of a recession. The Russell 2000 index
RUT,
+1.93%
entered a bear market last week, falling at least 20% from its recent peak. And the yields for the 10-year
TMUBMUSD10Y,
1.771%
and 2-year Treasury notes
TMUBMUSD02Y,
1.164%
have compressed, usually viewed as a sign of an impending recession if the yields for shorter dated bonds rise above those for longer maturities.

And the rest of the stock market, looks fragile, even after a Friday flourish into the close, other equity bourses are looking at big monthly losses. Beyond the Nasdaq Composite, the Dow Jones Industrial Average
DJIA,
+1.65%
is down 4.4% so far in January, the S&P 500 index
SPX,
+2.43%
is off 7% thus far in the month and the Russell 2000 index is down 12.3% month to date.

Katz said that he’s advising many of his clients to look for quality stocks. ”

“High-quality growth and tech names have been wearing the black eye for [speculative tech], but “those [quality] stocks are starting to find their footing,” he said.

Indeed, Apple Inc.
AAPL,
+6.98%,
for example, surged 7% on Friday to mark its best percentage gain since July 31, 2020.

Katz also said international, and developing markets are good investments as well as small and midcap stocks. “I would remain long equities here, it’s just the right equities,” the UBS wealth manager said.

That said, wild intra and interday price swings are likely to continue to be a feature of this phase in financial markets, as the economy transitions from the COVID-19 pandemic and toward a regime of higher rates.

But slumps don’t necessarily mean the end of the world.

“Not every pullback becomes a correction, and not every correction becomes a bear…and not every bear becomes a diaster,” Katz said.  

Hogan said that downturns also can be viewed as opportunities.

“Volatility is a feature not a bug, and the price we pay for the long-term higher average returns in the U.S. equity market,” he said.

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What to expect from markets in the next six weeks, before the Federal Reserve revamps its easy-money stance

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Federal Reserve Chairman Jerome Powell fired a warning shot across Wall Street last week, telling investors the time has come for financial markets to stand on their own feet, while he works to tame inflation.

The policy update last Wednesday laid the ground work for the first benchmark interest rate hike since 2018, probably in mid-March, and the eventual end of the central bank’s easy-money stance two years since the onset of the pandemic.

The problem is that the Fed strategy also gave investors about six weeks to brood over how sharply interest rates could climb in 2022, and how dramatically its balance sheet might shrink, as the Fed pulls levers to cool inflation which is at levels last seen in the early 1980s.

Instead of soothing market jitters, the wait-and-see approach has Wall Street’s “fear gauge,” the Cboe Volatility Index
VIX,
-9.28%,
up a record 73% in the first 19 trading days of the year, according to Dow Jones Market Data Average, based on all available data going back to 1990.

“What investors don’t like is uncertainty,” said Jason Draho, head of asset allocation Americas at UBS Global Wealth Management, in a phone interview, pointing to a selloff that’s left few corners of financial markets unscathed in January.

Even with a sharp rally late Friday, the interest rate-sensitive Nasdaq Composite Index
COMP,
+3.13%
remained in correction territory, defined as a fall of at least 10% from its most recent record close. Worse, the Russell 2000 index of small-capitalization stocks
RUT,
+1.93%
is in a bear market, down at least 20% from its Nov. 8 peak.

“Valuations across all asset classes were stretched,” said John McClain, portfolio manager for high yield and corporate credit strategies at Brandywine Global Investment Management. “That’s why there has been nowhere to hide.”

McClain pointed to negative performance nipping away at U.S. investment-grade corporate bonds
LQD,
+0.11%,
their high-yield
HYG,
+0.28%
counterparts and fixed-income
AGG,
+0.07%
generally to begin the year, but also the deeper rout in growth and value stocks, and losses in international
EEM,
+0.49%
investments.

“Every one is in the red.”

Wait-and-see

Powell said Wednesday the central bank “is of a mind” to raise interest rates in March. Decisions on how to significantly reduce its near $9 trillion balance sheet will come later, and hinge on economic data.

“We believe that by April, we are going to start to see a rollover on inflation,” McClain said by phone, pointing to base effects, or price distortions common during the pandemic that make yearly comparison tricky. “That will provide ground cover for the Fed to take a data-dependent approach.”

“But from now until then, it’s going to be a lot of volatility.”

‘Peak panic’ about hikes

Because Powell didn’t outright reject the idea of hiking rates in 50-basis-point increments, or a series of increases at successive meetings, Wall Street has skewed toward pricing in a more aggressive monetary policy path than many expected only a few weeks ago.

The CME Group’s FedWatch Tool on Friday put a near 33% chance on the fed-funds rate target climbing to the 1.25% to 1.50% range by the Fed’s December meeting, through the ultimate path above near- zero isn’t set in stone.

Read: Fed seen as hiking interest rates seven times in 2022, or once at every meeting, BofA says

“It’s a bidding war for who can predict the most rate hikes,” Kathy Jones, chief fixed income strategist at Schwab Center for Financial Research, told MarketWatch. “I think we are reaching peak panic about Fed rate hikes.”

“We have three rate hikes penciled in, then it depends on how quickly they decide to use the balance sheet to tighten,” Jones said. The Schwab team pegged July as a starting point for a roughly $500 billion yearly draw down of the Fed’s holdings in 2022, with a $1 trillion reduction an outside possibility.

“There’s a lot of short-term paper on the Fed’s balance sheet, so they could roll off a lot really quickly, if they wanted to,” Jones said.

Time to play safe?

““You have the largest provider of liquidity to markets letting up on the gas, and quickly moving to tapping the brakes. Why increase risk right now?””


— Dominic Nolan, chief executive officer at Pacific Asset Management

It’s easy to see why some beaten down assets finally might end up on shopping lists. Although, tighter policy hasn’t even fully kicked in, some sectors that ascended to dizzying heights helped by extreme Fed support during the pandemic haven’t been holding up well.

“It has to run its course,” Jones said, noting that it often takes “ringing out the last pockets” of froth before markets find the bottom.

Cryptocurrencies
BTCUSD,
-0.78%
have been a notable casualty in January, along with giddiness around “blank-check,” or special-purpose acquisition corporations (SPACs), with at least three planned IPOs shelved this week.

“You have the largest provider of liquidity to markets letting up on the gas, and quickly moving to tapping the brakes,” said Dominic Nolan, chief executive officer at Pacific Asset Management. “Why increase risk right now?”

Once the Fed is able to provide investors will a more clear road map of tightening, markets should be able to digest constructively relative to today, he said, adding that the 10-year Treasury yield
TMUBMUSD10Y,
1.771%
remains an important indicator. “If the curve flattens substantially as the Fed raises rates, it could push the Fed to more aggressive [tightening] in an effort to steepen the curve.”

Climbing Treasury yields have pushed rates in the U.S. investment-grade corporate bond market near 3%, and the energy-heavy high-yield component closer to 5%.

“High yield at 5%, to me, that’s better for the world than 4%,” Nolan said, adding that corporate earnings still look strong, even if peak levels in the pandemic have passed, and if economic growth moderates from 40-year highs.

Draho at UBS, like others interviewed for this story, views the risk of a recession in the next 12 months as low. He added that while inflation is at 1980s highs, consumer debt levels also are near 40-year lows. “The consumer is in strong shape, and can handle higher interest rates.”

U.S. economic data to watch Monday is the Chicago PMI, which caps the wild month. February kicks off with the Labor Department’s job openings and quits on Tuesday. Then its ADP private sector employment report and homeownership rate Wednesday, following by the big one Friday: the January jobs report.

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Business

Is the U.S. stock market closed on Friday for New Year’s Eve? No. It isn’t even closed on Monday. Here’s why!

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Blame it on an obscure rule. For the first time in a decade, there will be no U.S. stock-market closure in observance of New Year’s Day which falls on a Saturday.

U.S. markets will be open on Friday Dec. 31, which is New Year’s Eve, and operators of the New York Stock Exchange are not designating Jan. 3, the first Monday in 2022, as a holiday in lieu of New Year’s Day either.

The last time this sort of calendar event transpired was on New Year’s Eve in 2010.

How rare is this calendar event? Assuming that it was applied since 1928, it would have occurred 13 times from 1928.


Dow Jones Market Data

The lack of a New Year’s Day respite for stock traders is the result of NYSE Rule 7.2, which stipulates that the exchange will be closed either Friday or the following Monday if the holiday falls on a weekend, unless “unusual business conditions exist, such as the ending of a monthly or yearly accounting period.”

In this case, the last day of December is a trifecta of accounting dates, including month-, quarter- and year-end dates, and comes as markets have experienced a year end rally.

Although U.S. bond markets also will be open on Friday, the trading body that oversees fixed-income trading, The Securities Industry and Financial Markets Association recommends a 2 p.m. close for trading in bonds, such as the 10-year Treasury note
TMUBMUSD10Y,
1.514%
an hour earlier.

For its part, the U.S. stock market this year has seen its best start to a Santa Claus rally, usually defined as trading during the last five sessions of the year and the first two days of the new year, in a couple of decades.

Investors have essentially dismissed concerns about the economic impact of the omicron variant of COVID. The Dow Jones Industrial Average
DJIA,
+0.12%
and the S&P 500
SPX,
+0.04%
were on track for gains of about 5% or better in December and have risen by at least 1.5% on the week, while the Nasdaq Composite
COMP,
-0.26%
was looking at a gain of about 2% on the month and 1% on the week, as of Thursday afternoon.

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Business

There’s a lesson from Charlie Munger’s increased bet on Alibaba

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You wouldn’t expect a 97-year-old to necessarily have a lot of patience, but legendary investor Charlie Munger is doing just that with one of his holdings.

Munger’s Daily Journal
DJCO,
+2.17%
nearly doubled its stake in Chinese internet giant Alibaba Group Holding
BABA,
+8.26%
in the third quarter, a Securities and Exchange Commission filing released this week showed. (Holdings in Bank of America
BAC,
-0.27%,
Posco
PKX,
+1.37%,
US Bancorp
USB,
+0.70%
and Wells Fargo
WFC,
-0.23%
were unchanged.)

Munger, also the vice chairman of Berkshire Hathaway
BRK.B,
+0.97%,
now has about 18% of Daily Journal’s portfolio in Alibaba, at a basis of between $180 and $200 per share, says Tom Hayes, chairman and managing member of Great Hill Capital, who has also invested in Alibaba. Alibaba closed Thursday at $156.

Hayes says there are key lessons to be learned from Munger’s investment. “For starters, successful people do what unsuccessful people won’t. He’s willing to take some short-term pain for long-term gain. Not on the basis of wishing or hoping, but on the basis of facts and data,” says Hayes.

Granted, yes, Alibaba has been fined for monopolistic practices, and China has aggressively sought to tame its big businesses. There also are efforts afoot by the Securities and Exchange Commission to delist Chinese companies, though Hayes points out that Alibaba’s auditor is PwC, and he doesn’t believe Chinese listings with big four auditors will be removed.

Alibaba has been growing its top line, and cash flow is forecast to more than double in the next few years. You can now pay less for Alibaba than it was when the company was less than a third of its current size, says Hayes. And it will be tough to find one billion users elsewhere. “And that’s why Buffett and Munger are the best investors around,” Hayes said.

The chart

The spread between the yield on the 10-year Treasury note and the 3-month bill has the highest correlation to gross domestic product growth one year out, of any yield curve indicator. And, at the current spread, the economy will expand at 2.3% next year, a far cry from the 3.8% the Federal Reserve is projecting. “While the yield curve may not be able to give an exact estimate of future economic activity, it sure can give an indication about the general direction of growth. And right now, what the curve is saying is that growth will be way below where the consensus and the Fed expect it to be, thus leaving enough room for disappointment,” said David Rosenberg, chief economist and strategist at Rosenberg Research.

The buzz

The big event of the day is the Canadian jobs report. Nah, just kidding, it’s the U.S. nonfarm payrolls report, which is expected to show a 500,000 increase in jobs and the unemployment rate ticking down to 5.1%. Federal Reserve officials have set a low bar for this report to clear in order to initiate the bond taper program, with Chair Jerome Powell saying it only has to be “reasonably good.”

Strategists at Bank of America point out that 10 of the last 12 payrolls report have sparked risk-on behavior in markets.

U.S. stock futures
ES00,
+0.12%

NQ00,
+0.09%
were a touch higher ahead of the report, while the yield on the 10-year Treasury
TMUBMUSD10Y,
1.585%
edged up to 1.58%.

The Senate voted Thursday night to lift the debt ceiling by $480 billion, moving the legislation to the House, which is expected to do likewise.

Electric-car maker Tesla
TSLA,
+1.39%
announced it was moving its headquarters to Texas from California.

Oshkosh
OSK,
+1.16%
warned that supply-chain and logistics disruptions were hurting its ability to make and ship units, as it lowered guidance for its fiscal fourth quarter.

The 2021 Nobel Peace Prize was awarded to journalists Maria Ressa of the Philippines and Dmitry Muratov of Russia for their fight for freedom of expression.

Random reads

Walmart’s
WMT,
+1.18%
Sam’s Club is offering bigger turkeys this year. Here’s why.

A six-year-old is Georgia’s youngest certified farmer.

A remote stun gun-style device is being used — to quiet dancing grannies in China.

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Business

Here’s the big challenge confronting the Fed — and it’s not the taper

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It would be a great few days to be a fly on the wall at the Federal Open Market Committee meeting.

Even were it normal times, there’s the scandal of regional Fed presidents engaging in stock-market trading, which at least one outside group has said was possibly illegal. But it’s not normal times.

A key issue is the fate of its bond purchase program. A slightly out-of-consensus call comes from Drew Matus, chief market strategist at MetLife Investment Management, who says the Fed will wait until the beginning of next year to start reducing its bond purchases. “They’re trying to find the perfect time to do something that people might not react kindly to, and you probably don’t want to upset the holidays for people,” he says.

There’s also the situation at property developer China Evergrande
3333,
-0.44%,
which has captured media headlines this week as it struggles to pay off creditors. Matus doesn’t expect China to be mentioned in the FOMC statement, and possibly not even the minutes. “Once they get to the point where they don’t think that there’s any sort of systemic risks to the U.S., and financial markets are functioning, that’ll be the end of the conversation, and they will migrate onto other things,” he says.

The big issue confronting the Fed is that demand has recovered more quickly than supply, creating all sorts of shortages as companies struggle to find the necessary workers and parts. “The more widespread shortages are, and the more that we talk about different products being in short supply, the more likely it is that a growing proportion of the consumer class is seeing their expectations for inflation de-anchor,” he says.

Matus says these shortages threaten the economic cycle. “It’s a race between how much do companies have to pay for things, and how much of that can they pass on to consumers,” he says. If corporate profit margins contract sharply, that would increase the chances of a recession, he says. The word “shortage” has received the most mentions in the Federal Reserve’s Beige Book of economic anecdotes since 1973, during the OPEC oil embargo. “If you think of 1973, the U.S. economy wasn’t really functioning all that well then,” he says.

He says he’s perplexed why bond yields remain so low. “When you’re looking at a 10-year note
TMUBMUSD10Y,
1.325%
in the U.S., you’re looking not just at inflation next year, you’re trying to estimate where inflation is going to be over the next 10 years. And so even if inflation moderates from current levels, you would expect inflation would probably average over a 10 year period much higher than the current yield is,” he says, adding he doesn’t think real yields should be negative. The 10-year TIPS yielded -0.98% on Tuesday.

What could be happening is that investors are seeking a flight to quality, he says, though that doesn’t neatly fit with stock markets near records, and other assets surging. “You have to put the money somewhere,” he replies.

Matus says investors are in an unusual position where they can’t measure critical factors like the duration of the pandemic or how it will spread. “I think for a lot of investors, it defaults to basically, ‘do I want to be in the market or do I want to be out in the market, am I risk on or am I risk off?’ And I think that’s the behavior that you’re seeing in financial markets today.”

Market focus on the Fed dot plot

The Federal Reserve decision comes at 2 p.m. Eastern, and Chair Jerome Powell’s press conference is at 2:30 p.m. Key to the market reaction will be the dot plot of interest-rate forecasts. “Today’s dotplot likely will show more dots for a rate hike in 2022, but it’s not clear that progress since the June meeting has been enough to push three more FOMC members — making a majority — into expecting action next year,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

The onshore subsidiary of China Evergrande said it has resolved the issue of its coming debt payment, as the fate of a dollar-denominated bond remains in doubt. A report said Evergrande could be restructured into three separate entities that would involve state ownership.

An example of the margin pressure Matus discussed came as shipping and logistics giant FedEx
FDX,
-8.65%
lowered its outlook for the year, citing supply-chain disruptions and a tight labor market.

Adobe
ADBE,
-4.69%
beat Wall Street estimates, though the software maker’s stock still saw pressure.

The Justice Department is investigating Zoom Video Communication’s
ZM,
-0.73%
deal to buy Five9
FIVN,
-0.54%
for $15 billion over China ties, according to a letter posted on the Federal Communications Commission website.

Restaurant payments company Toast
TOST,

is due to start trading, after pricing its initial public offering at $40 per share, significantly above the expected range to garner a $20 billion valuation.

Netflix
NFLX,
+1.66%
agreed to buy the Roald Dahl Story Co., adding popular children’s stories to its stable — and the ability to make not just films and television shows but also games and live theater.

The market

After the 10th drop in 12 sessions for the S&P 500
SPX,
+0.40%
on Tuesday, stock futures
ES00,
+0.55%

NQ00,
+0.27%
were pointing solidly higher.

The yield on the 10-year Treasury
TMUBMUSD10Y,
1.325%
was 1.32%.

Random reads

Conor McGregor is a better fighter than pitcher.

A mountain goat is a better fighter than a grizzly bear, at least this one time.

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