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All three major U.S. stock indices trended down last week, digesting news that the U.S. Federal Reserve will end its multi-trillion dollar bond-market scheme in about three months, start raising interest rates next year and the fear of possible economic damage from the Omicron virus.
Last Friday, the Dow Jones Industrial Average gave up 1.5 percent, the NASDAQ less than 0.1 percent, and the Standard & Poor’s 500 index lost 1 percent.
On the Fed front, considering the latest 6.8 percent inflation rate, the Fed’s near-zero interest rates are actually deep in negative territory, yet the money junkies on The Street want to keep the flood of cheaper-than-cheap money flowing. And, if the Fed sticks to what it suggests, rates will only rise to 0.75 percent next year.
The Bank of England raised its key rate from 0.1 percent to 0.25 on 16 December (see related story in this issue), Russia raised its rate a day later, and several other countries either have raised rates or are poised to.
“The underlying primary fear in the market is inflation,” David Donabedian, chief investment officer at CIBC Private Wealth.
As a result, investors are rebalancing portfolios toward stocks, dumping the speculative ones and moving into those that will become more valuable if inflation rises and Omicron increases the work-at-home and other trends that will benefit various market sectors.
Share prices of Zoom Communications, Peloton Interactive, and vaccine maker Moderna all bucked market headwinds and rose on Friday.
Brent crude slipped 2 percent to close at $73.52 Friday on fears of an Omicron-related economic slowdown. Gold, a traditional hedge against inflation, edged up 0.4 percent.
The Stoxx Europe 600 index shed 3.5 percent Friday as natural gas prices soared (see related story in this issue).
Japan’s Nikkei 225 dumped 1.8 percent, Hong Kong’s Hang Seng index dropped 1.2 percent, and the Shanghai Composite Index also ended down 1.2 percent.
“Treacherous” Undercurrents
Beneath stock indices’ record prices, “treacherous undercurrents” are dragging down share prices for hundreds of companies to their lowest levels in a year, according to the Financial Times.
Earlier this month, 1,380 U.S. stocks sank to their lowest price this year, the FT found.
A few days later, the S&P 500 set a new record while 210 of its stocks—close to half—were at least 10 percent off their highs for the year.
Just five S&P stocks—Google’s parent company Alphabet, Apple, Microsoft, Nvidia, and Tesla—have given the index half of its gains since April, Goldman Sachs has estimated.
On the NASDAQ, which is tech-heavy, 1,300 of the index’s 3,300 stocks are down by at least 50 percent over the past 12 months and 80 percent are down at least 10 percent, according to FT calculations.
Options trading reached a record pitch in November, the Options Clearing Corporation reported.
As of 18 December, the month had seen two days on which options trades topped 50 million, a level seen only ten times before in the corporation’s history and an indication of markets’ volatility and investor jitters.
“Right now, the index moves are completely misleading to what’s going on below the surface,” Brian Bost, Barclays co-head of equity derivatives for the Americas, said in an FT interview.
The disparity between workaday stocks and the market’s marquee names portends a market reversal likely to be worsened by the U.S. Federal Reserve’s newly announced policy tightening, the FT noted.
“We are possibly on the verge of the Fed taking away the punch bowl for the first time in three years,” portfolio manager Jason Goldberg at Capstone Investment Advisors, a hedge fund that trades on volatility, told the FT.
“Think about how many strategies are predicated on the Fed having one’s back,” he said. “You have to rethink those.”
“No one knows what will happen with inflation,” Bost noted. “We are on the verge of a regime where people do say ‘we need to get out of equities’,” he said.
TRENDPOST: We have been warning for months that equity markets are overpriced, with record highs divorced from economic reality and, as Goldberg said, predicated on the faith that the Fed has investors’ backs, with its ocean of cheap money.
TREND FORECAST: We also have forecast that when the Fed begins to turn off the cheap-money tap, markets will decline as evidenced by last week’s sell-off and the major U.S. stock indexes declining yesterday for the third consecutive session.
As the Fed winds down its bond-buying program, bond markets will tighten from the bottom up: first, investors will dump junk bonds and money will flee up the ratings scale to safety.
Equity markets are peaking. As interest-rate hikes approach, investors will batten down their portfolios, locking down value stocks and becoming much more cautious and selective in their bets.
With each quarter-point rate hike, the equity and housing markets will shed value. We maintain our forecast that when rates pass 1.5 percent, housing and equity markets will suffer a sharp reversal.
This Week
Equites across the globe dove yesterday as the Omicron fear kept overwhelming the mainstream news of rising “cases”… and as we detail in this Trends Journal in our COVID War section, not rising deaths.
In fact, today was the first reported Omicron death from a person who had, according to a press release from Harris County Public Health, “The individual … had underlying health conditions.”
Indeed, as we reported, according to the Centers for Disease Control and Prevention, some 94 percent of those who have died of the virus have 2.6 pre-existing comorbidities and the COVID recovery rate overall is an estimated 99.7 percent.
Yet, the headlines scream that one person (who was in poor health) out of a population of 333 million Americans died of the Omicron virus.
Yesterday the Dow closed down 433 points, the S&P fell 1.1 percent and the Nasdaq was down 1.2 percent.
Overseas, the pan-continental Stoxx Europe 600 slumped 1.4 percent, and the Asian Indexes also closed down over 1 percent.
Today equities sprang back, with shares in the Asia Pacific recouping yesterday’s losses with the Nikkei up 2 percent and Shanghai up 1 percent. In Europe, Stoxx 600 was up 1.4 percent with travel and leisure stocks jumping 3.5 percent… despite strict travel restrictions, lockdowns, COVID mandates and vax passport requirements.
In the States, again, despite the spreading fear of travel, tourism and hospitality would be hit by the Omicron fear… equities snapped back with airlines, cruise lines and entertainment stocks leading the charge.
Carnival, the cruise line company saw its stock spike 8.7 percent. Delta Air Lines and United Airlines were up 5.9 percent and 6.9 percent respectively. Over in Nevada, America’s gambling hub, Caesars Entertainment jumped 8.75 percent and Las Vegas Sands spiked 8.4 percent. Again, the equities that should be hit the hardest by the fear of a spreading Omicron virus, shot up the highest.
Today, the Dow closed up 560 points, the S&P 500 rose 1.8 percent and the Nasdaq jumped 3 percent.
GOLD/SILVER: With fears of Omicron lessening on The Street, and the dollar and bond yields moving higher, gold was down some $6 today, closing at $1,788 per ounce while silver jumped up over 1 percent closing at $22.50 per ounce. Both precious metals are still stuck in their months-long trading range.
TREND FORECAST: As we note in this and previous Trends Journals, the economy cannot run without cheap money. Thus, as a result of the cheap money drying up when interest rates go up, the economy and equity markets will sharply decline… which will in turn strongly drive up precious metals and cryptocurrency prices as investors seek safe haven assets.
Also, minus a wild card event, such as the Fed rushing to push interest rates much higher, we forecast that gold will stay above $1,700 per ounce and silver’s bottom will be in the $18 per ounce range.
And, what is absent in the media coverage, as interest rates climb, so too will the cost of servicing the massive government and corporate debt that was accumulated when interest rates hit rock bottom. Thus, the greater the debt load and the slower the economy grows, the higher the levels of default.
BITCOIN: Same story, different week. Once again there was spreading Bitcoin fear last week that the best of the cryptocurrency’s days were over when the coin slid down to the $45K range.
As we go to press, it’s trading in the $48.5K range, about $1K higher than last week. Thus, as with precious metals, bitcoin is also stuck in its trading range.
We maintain our forecast that bitcoin is not in a dive position and that when it solidly breaks above the $55K range per coin, it will hit new highs.
TREND FORECAST: We maintain our GSB—Gold, Silver, Bitcoin—forecast that all three will maintain and then pass their current and previous highs when, after the U.S. Fed rate hits 1.5 percent, equity markets sharply fall and the economies sink into Dragflation: Declining Gross Domestic Product and rising inflation.
We also maintain that a major factor in forecasting the future price of bitcoin and other crypto currencies is dependent upon government regulations. However, that threat in the U.S. and Europe will lessen as more banks, businesses and investment funds are going crypto, thus, the upward crypto trends, especially bitcoin, will continue to gain momentum.
(For more on bitcoin and other cryptocurrencies, please see our “TRENDS IN CRYPTOS” section.)
OIL: Despite Brent crude recently sinking below $70 per barrel over fears of nations imposing COVID War 2.0 travel curbs, lockdowns and other restrictions that are throwing work, leisure and travel plans into chaos… oil prices snapped back with Brent closing today $74.24 per barrel and West Texas Intermediate at $71.47 per barrel.
TREND FORECAST: We maintain our forecast that oil production will continue to moderate and while OPEC+ plans to gradually increase supply every month by 400,000 barrels per day (bpd) after sharply cutting back output last year, should the COVID War 2.0 continue to ramp-up and economies decline, they will limit output to keep prices in their current range.