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- Major U.S, indexes now green; FANGs outperform, chips still weak
- Staples lead S&P sector gainers; financials weakest group
- Europe's STOXX 600 index ends up ~0.1%
- Dollar, bitcoin fall; gold, crude rise;
- U.S. 10-Year Treasury yield retreats to ~1.84%
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STIFEL'S BANNISTER SEES S&P 500 DROP TO 4,200 POSSIBLE IN Q1 (1210 EST/1710 GMT)
Barry Bannister, chief equity strategist at Stifel, has reiterated on Wednesday his call for a market correction, this time estimating the S&P 500 could fall to 4,200 and probably in the first quarter of 2022. (4,200 is around 8.5% below the SPX's current level of ~4,590).
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Bannister notes that tighter financial conditions will bring about a decline in the P/E ratio, with global M2 money slowing as the dollar strengthens from a flight to safety and the Fed exit from its soft monetary policy.
While the equity risk premium (using CAPE operating EPS earnings yield minus the 10-year TIPS real yield) may be a bullish offset, that is countered by the rising 10-year TIPS real yield weakening growth P/E ratios more than value.
In addition, Bannister also believes earnings per share looks extended, having only taken one year to bounce back in 2021 following the 2020 recession compared with the three years it took earnings to rise above trend in the wake of the 2000 and 2009 recessions. That fast rebound was the result of fiscal support, according to Bannister, which replaced income lost from the COVID-19 pandemic, leaving actual EPS due to slow.
Another negative, according to Bannister is tightening of stimulus by China in 2021, which usually leads global PMIs by about 8 months. Should the tightening spill over as expected to the U.S. PMI in the first half of the year, the S&P 500 may soon decline closer to the spring 2021 level of about 4,200.
MID-TERM ELECTIONS AND THE MARKET (1139 EST/1639 GMT)
The U.S. market tends to be volatile in mid-term election years according to the latest research from Bespoke Investment Group which points out that "2022 is living up to that reputation so far."
Here are the numbers in aggregate behind that reputation. In the post-WWII period, the S&P 500 has actually gained 5.03% on average in mid-term years, but it compares with the average gain of 8.95% for all years and is more than five percentage points lower than the average for all non-mid-term years in the post-WWII period, Bespoke wrote.
But the data crunching firm sees the stand out illustration in "how weak the S&P 500 has been during the summer months and early fall" in mid-term years.
"Overall, the S&P 500 tends to consolidate YTD gains during this period," but during mid-term years the S&P has shown a "first-half peak in April and steady weakness right through the end of Q3."
Bespoke also looked at the percentage of time the S&P 500 is positive YTD at different times throughout the year.
Besides a brief period in March when the S&P 500 has been higher YTD more consistently than it has been in all other years, "for the rest of the year, the S&P 500 was never higher YTD more than two-thirds of the time," according to the research. But for all other years the S&P 500 was higher YTD at least 70% of the time, it said.
Here is a graphic from Bespoke showing mid-term year underperformance:
HOUSING: DUST HASN'T YET SETTLED ON THE GREAT SUBURBAN LAND RUSH (1055 EST/1555 GMT)
Nearly 133 years ago, tens of thousands of people waited at the Oklahoma border for the green light to commence a stampede into the territory in their race to stake a claim.
Housing data released on Wednesday showed the more recent - although less brutal and bloody - pandemic-driven stampede for the suburbs continues apace. However, as the dash for suburbia drones on, homebuilders are struggling to keep up as demand continues to outpace supply, and as a lack of materials and buildable lots weigh on affordability.
Ground breaking on new U.S. homes unexpectedly increased last month by 1.4% to 1.702 million units at a seasonally-adjusted annualized rate (SAAR), according to the Commerce Department.
Consensus called for a 1.7% decline.
"The strong starts in December, a historically slower month amid the holiday season, reflects market optimism in the residential sector, and bodes well for a strong start to 2022," writes Kelly Mangold, Principal at RCLCO Real Estate Consulting.
Building permits - a more forward-looking indicator - also defied expectations by surging by 9.1% to 1.873 million units SAAR, a solid acceleration from November's 3.9% increase.
This would appear to be a strong indication that homebuilders are indeed expecting the demand wave to continue.
"New home inventory is now more than three times higher, relative to sales, than inventory of existing homes, the biggest gap ever, by far," says Ian Shepherdson, chief economist at Patheon Macroeconomics.
As illustrated by the graphic below, both housing starts and building permits, despite recent fluctuations, remain at or above pre-COVID levels.
Homebuilders "will be closely watching how people respond to rising mortgage rates; a further surge in new home construction at this point looks risky to us," Shepherdson adds, providing a tidy segue.
Applications for home loans increased by 2.3% last week even as interest rates continue their uphill climb.
Mortgage Bankers Association (MBA) data showed the average 30-year fixed contract rate following Treasury yields higher, rising 12 basis points to 3.64%.
Even so, demand for loans to purchase homes .
"Mortgage rates hit their highest levels since March 2020, leading to the slowest pace of refinance activity in over two years," notes Joel Kan, associate vice president of economic and industry forecasting at MBA.
Interestingly, the average loan size for purchase applications hit a record $418,500, largely a symptom of depleted housing inventories, and further evidence that home ownership is drifting beyond the realm of affordability, particularly at the lower end of the market.
Indeed, demand for loans to buy homes is down about 12% over the last year, with overall mortgage applications around 37% below year-ago levels, as seen in the graphic below:
While building permits and purchase loan applications are among the sectors most leading indicators, as they offer clues as to into home sales a month or two down the road, housing stocks offer the most forward-looking view of them all, reflecting where investors expect the sector to be six months to a year from now.
Housing stocks have generally outperformed the broader market over the course of the pandemic as market participants generally back the notion that the COVID housing boom still has gas in its tank.
"Pent-up demand, the need for supply, relatively upbeat homebuilder sentiment and an elevated backlog of starts will support new home construction this year," says Nancy Vanden Houten, lead U.S. economist at Oxford Economics. "However, persistent supply-side constraints, including record shortages of labor, will continue to pose headwinds and prolong construction timelines."
So far this year, that outperformance has narrowed.
U.S. STOCKS BOUNCE IN EARLY TRADE (1013 EST/1513 GMT)
U.S. stock indexes are bouncing on Wednesday after upbeat results from a host of companies partially offset a wobbly start to the fourth-quarter reporting season, while Big Tech stocks also made a comeback after a bruising selloff.
This as the U.S. 10-year Treasury yield has dipped back to the 1.85% area after hitting a high of 1.9020%.
In any event, the Nasdaq Composite (.IXIC), at around 14,630, has work to do if it is to reclaim its 200-day moving average. This long-term moving average now stands as resistance at around 14,740.
Here is where markets stand in early trade:
TREAD CAREFULLY WITH THE NASDAQ (0940 EST/1440 GMT)
Fears of rising interest rates are triggering a selloff in global stocks, but the Nasdaq could be at greater risk due to its stronger retail participation, says Jefferies.
The shape of the U.S. yield curve prices equities in two different ways, the New York-based brokerage explains: The long-end is a gauge on valuation, and equities are long-duration assets.
Any changes to short-term rates influence speculative behavior, since it changes the cost of purchasing assets through the carry-trade, margin-financing, repo rates, and so on. The movement in short-rates, then, can also dictate a firm's ability to raise money, as capital markets can be fickle when rates start to move up too quickly.
Interestingly, Jefferies notes similarities between now and the 2000-1 period, when a faster Fed tightening cycle was under-appreciated after ‘Y2K’ fears proved unfounded. “True, the constituents are very much different as are the business models, but the degree of margin financing and heightened risk appetite is similar.”
Moreover, the first four or so months of 2021 saw a wide divergence in the performance between S&P 500 companies depending on their FCF yield as U.S. yields pivoted upwards, analysts added. "Indeed, high PE stocks were equally hurt."
The bottom line, Jefferies says, is that gyrations in the treasury market will influence the high PE, low FCF yield stocks the most. They expect the 10-Year Treasury, which earlier on Wednesday reached 1.90%, to settle ~2.4% by the end of 2022.
“The sell-off of 2-year treasury yield notes is an excellent lead indicator of rate tightening cycles which then means higher margin financing costs. The consistency of earnings growth in the FAANG+M ought to mean that they provide an ‘adequate’ hedge to Nasdaq. Remain long S&P 500, tread carefully with Nasdaq,” the analysts write.
NASDAQ 100: CAN THIS VIXEN COOPERATE? (0900 EST/1400 GMT)
The Nasdaq 100 index (.NDX) ended Tuesday down a little more than 8% from its November 19 record close.
Meanwhile, despite the Nasdaq 100's recent drubbing, the CBOE Nasdaq 100 Volatility index (.VXN) has yet to surpass its December 3rd high:
The VXN spiked to a high of 36.64 on December 3. Since then, and despite lower NDX lows on either an intraday or closing basis, the VXN has been making lower highs. It ended Tuesday at 29.36.
Of note, since early 2020, the six biggest NDX declines from record-high territory ultimately saw lows accompanied by a lower VXN high on a multi-week/multi-month basis.
This as the spikes in the implied volatility measure were either their most intense earlier on in the declines, or were less severe vs the most recent period of instability.
Therefore, traders will be watching Nasdaq 100 volatility closely vs its 36.64 early-December high. A calming VXN can coincide with an unfolding NDX recovery attempt.
That said, a VXN thrust above 36.64 will cause this pattern to reset, suggesting the potential for much greater NDX weakness. read more
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