Bah Humbug

By Peter Tchir of Academy Securities

There hasn’t been much of a “Santa” rally this year unless you consider a 0.2% drop (in a volatile week) on the S&P 500 a good thing. I would not call that a rally, especially with the Nasdaq down almost 2% on the week and the 10-year Treasury finishing 25 bps higher at 3.75%.

The 10-year move made sense because a sub 3.5% yield seemed aggressive (even for someone as pessimistic on the economy and the inflation story as me). We also had the BOJ surprise everyone by allowing their bonds to move to higher yields. That is generally a good thing as I prefer “free-er” markets rather than those controlled by central banks. It caused global yields to pop higher, though Japan (with barely any inflation) shouldn’t directly cause this to spread. The risk is that yen denominated bond buyers, who have been buying dollar (and presumably euro) bonds and hedging the FX risk, could go on a bigger “buyer strike” than they’ve already been on. Alternatively, they could start selling foreign bonds when their FX hedges roll off since they can now achieve a modicum of yield directly in JGBs further out on the curve (this would be an even worse outcome). That is a risk I’m watching out for and think that while it will pressure yields, it is unlikely to be the key driver.

For the stock market (which seemed to oscillate back and forth) there were three main stories:

• There were numerous stories about JHEQX (a large mutual fund) having to roll over a large options trade into year-end (which is part of their strategy). The “vol killer,” according to Bloomberg on December 20th, “pegged” the S&P 500 to the 3,835 level (it closed at 3,844). It would be nice to see a quiet week going into year-end so we can have the only quiet week of 2022! Seriously, it is difficult to remember any week that didn’t have high volatility this year.
• The question of whether “good news” is “good” or “bad” seems to have been answered last week: “It depends.” It seemed exceptionally hard to tease a consistent narrative out of stocks last week, but we can blame it on “thin liquidity” rather than “not paying enough attention.”
• Tesla has lost almost $600 billion in market cap since mid-September and lost about $225 billion since the start of December. I don’t follow single stocks as a rule, but this move has caused a lot of chatter (mainly on Twitter) and weighed on broader markets (the Nasdaq 100 was down 8.7% on the month versus a 4% decline for the Dow).

So, as we head into the last week of the year, I will try to end this abbreviated T-Report with a bright spot (which goes against my cynical nature). Maybe with Ukraine still grabbing headlines and impacting energy markets and Europe, we will get a “Saint Nicholas” rally into January 7th as opposed to the traditional “Santa” rally.

I still expect that inflation will show signs of dropping (possibly off a cliff if you annualize recent data rather than looking at annual data). For more of our thoughts on this, please see Q1 Deflation, 2 + 2 = 5, The Rise and Fall of Inflation Factors, and Why We’d Be Lucky To Get a “Squishy” Landing). I still think that this all ends with a big “risk-off” trade (lower yields and new lows for stocks), but I’m trying to be jolly and hoping for one more good rally in which to sell stocks (I like bonds here)!

In case you missed it last week (and have some time today):

• Academy’s latest Around the World piece has some interesting and important 2023 outlooks!
• A fun and rather long interview on Thursday on Bloomberg TV (starts at the 28:40 mark).

Even if markets aren’t spreading that holiday cheer, I hope that you and your families are enjoying this time to the fullest.