Tech stocks took a beating on Monday as the broader market was roughly unchanged leading to a mixed close for the major averages.
The “FANG” stocks — or Facebook (-2%), Amazon (-2%), Netflix (-6%), and Google (-2%) — were among the day’s big losers.
Oil prices rose more than 5% again as Brent crude oil, the international benchmark, traded back above $40 a barrel for the first time since December.
First, the scoreboard:
- Dow: 17,073.6, (+66.8), (+0.4%)
- S&P 500: 2,001.8, +1.8, (+0.1%)
- Nasdaq: 4,708, -8.8, (-0.2%)
- WTI crude oil: $37.95, +5.6%
It’s a quiet week for the US economy, and so a time for Wall Street strategists and other commentators to take a minute to gather their thoughts and talk about what might really be going on out there. At Strategas Research Partners, Don Rissmiller argued that the subtle shift from economic data that was “mixed to bad” going to economic data that is “mixed to good” turned the whole thing around for markets.
Rissmiller noted that markets care about the “second derivative,” meaning that investors are more concerned with where the ball is heading rather than where it’s been.
This chart from Bespoke shows the increase in the US economic surprise index, indicating that data had been beating expectations, on balance, over the last several weeks. (Not coincidentally, the European Central Bank is expected to announce further easing measures this week.)
All of this is part of the theme that after investors couldn’t seem to do anything but brace for recession, the long-argued reality (at least from me) that no recession was imminent has led to some relief in markets.
Or as analysts at Oppenheimer put it in a note Monday, investors were still so bruised by the events of 2008 that even the impression of things not going well led to their acting like Mark Twain’s cat:
Mark Twain once observed that “If a cat sits on a hot stove, that cat won’t sit on a hot stove again. That cat won’t sit on a cold stove either. That cat just doesn’t like stoves.” In 2008, a whole generation of investors sat on a hot stove. The sub-prime market that was supposed to be small and containable wasn’t, and millions of investors got burned. Thus, perhaps it should not surprise us that investors have reacted with a hairpin trigger to what we view as reasonably modest stresses in what strikes us as an overall good economic picture.
As for actual economic data, the January report on consumer credit was a dud this afternoon, with outstanding balances rising by $10.5 billion, less than the $17 billion that was expected. Revolving credit balances — which includes things like credit card debt — fell by $1.3 billion, indicating a pullback in spending to start the year from US consumers.
Compared to last year, however, revolving debt was up 5.3%, which Bloomberg’s Matt Boesler noted was the fastest pace of credit growth since June 2008.
Here’s Parker (all emphasis ours)
Today’s consensus seems to be that the market goes up and down mid-to-high single digit increments in short but pretty volatile spurts, and ultimately ends up relatively flat six to 12 months from now. That means that we should feel worse now than we did a few weeks ago — not better, because the underlying fundamentals haven’t really moved that much but the market has. On top of this perception of a choppy market headed to nowhere,the consensus is also that the probability of the bear case is greater than the probability of the bull case, meaning the probability of a downward slope to this choppy range is material.
This is even more of a reason to be a bit more cautious than a few weeks ago. Yet, sentiment is clearly more positive. People are asking if they should take more risk now, but they were more negative last month. If the consensus is right that we will chop up and down — and we have some sympathy for this sentiment — then by the time we feel a little better, we should take off risk, not add some. Maybe you should do the opposite of what you think you should do. That’s the new risk management.
What did we say about a slow week allowing for introspection?
Of course, this is not new for Parker, per se, because it was only last month that he was telling clients that they’d have been better off not following his advice.
But when Parker writes, the financial commentariat listens because Parker tells it perhaps even too much like it is. Everyone wants a forecast but in our post-Shiller, post-Kahneman world, we all know that we don’t know anything and so must be self-referential about our unknowingness.
The curious part of Parker’s note is his recommendation investors be overweight financials and underweight energy stocks, considering that he conceded you’d need to know both the future level of the US 10-year and the future oil price in order to be right.
Elsewhere in big market call, uber-bear Bob Janjuah is reiterating his call for the S&P 500 to go back “into the 1500s” this year after a rally to the 2000/2050 area. The S&P 500 closed at xx on Monday.
The BIS Is Worried About NIRP
Since mid-2014, four central banks in Europe have moved their policy rates into negative territory.
These unconventional moves were by and large implemented within existing operational frameworks. Yet the modalities of implementation have important implications for the costs of holding central bank reserves.
The experience so far suggests that modestly negative policy rates transmit through to money markets and other interest rates for the most part in the same way that positive rates do. A key exception is retail deposit rates, which have remained insulated so far, and some mortgage rates, which have perversely increased. Looking ahead, there is great uncertainty about the behaviour of individuals and institutions if rates were to decline further into negative territory or remain negative for a prolonged period.
Which is fine. Look, to most people (though I would argue this is a moral, not financial, judgment but still) the idea of negative interest rates is downright perverse. Of course most private citizens living in a region that is covered by negative interest might not even know they are covered by negative interest rates.
And recall that the BIS noted private deposit rates haven’t yet been taxed (though fees on ATMs and other things may have increased, which is a backdoor into passing the costs of negative rates on to customers).
So but the real worry about negative interest rates seems to be that keeping rates at 0% for too long — or: using what was once an unconventional tool of monetary policy for a conventional amount of time — makes that tool less potent. And maybe so!
This, though, assumes that central banking is about creating a definitive reaction as much as it is about managing the present situation, which is sort of another discussion to have.
Elsewhere in the BIS’ report the bank noted that some of the instability seen in financial markets this year was related to investors’, “growing concern over the dwindling options for policy support in the face of the weakening growth outlook. With fiscal space tight and structural policies largely dormant, central bank measures were seen to be approaching their limits.”
And, again, I’m not entirely swayed.
On the one hand, the reluctance for governments to act — that is, lever up and spend money to stimulate economies — has been both a reaction to the massive spending programs that followed the crisis (in the US) and the euro sovereign debt crisis (in the EU), though I think it is somewhat naive to believe that if we really got into another financial-crisis-like situation there would be a total abdication of fiscal responsibility from across the lawmaking class. Maybe, though, I’m the one being naive.
On the other hand the market-based idea that there aren’t anymore tools for central bankers to use sort of overlooks how we got here in the first place. Namely: there is always another tool! More quantitative easing, lower interest rates, more jawboning, more reserves available for overnight borrowing, and so on.
Again, you might not like these options but these are more moral than economic worries. There is always something else central banks can do. And in time, one should assume we’ll find out what that is.
Bond Market Liquidity
Fed governor Lael Brainard conceded in a speech Monday that regulations have exacerbated liquidity conditions in some markets. But, the reason why is that trading liquidity in the form of more bank balance sheet space reserved for cash and other safe assets and pushing the riskier prop-type trading out into smaller funds actually makes everyone safer.
Across financial markets, it is difficult to disentangle the effects on liquidity of changes in technology and market structure and changes in broker-dealer risk-management practices in the wake of the crisis on the one hand and enhanced regulation on the other. While the leverage ratio and other Dodd-Frank Act requirements likely are encouraging broker-dealers to be more rigorous about risk management in allocating balance sheet capacity to certain trading activities, the growing presence of proprietary firms using algorithmic trading in many of these markets, which predated the crisis, is also influencing trading dynamics in important ways. … While acknowledging the role of regulation as a possible contributor, it is important to recognise that this regulation was designed to reduce the concentration of liquidity risk on the balance sheets of the large, interconnected banking organisations that proved to be a major amplifier of financial instability at the height of the crisis.
And for people who are going to be sceptical that complaints about bond market liquidity are much more than complaints about being able to get what you believed to be the carrying value of a B-rated callable bond when your potential counterparty knows you need to sell that bond to meet client redemptions, Brainard’s comments will hear a sympathetic audience.
Elsewhere, the Financial Times reports that bond funds have basically doubled their cash holdings over the last five years. So, the market knows there is a liquidity issue and, in response, is upping their liquid assets.
This is kind of what Brainard argues will happen in response to imposed regulations, more or less.