Daily Analysis 24 January 2022 (10-Minute Read)

Hello there, A magnificent Monday to you with no relief in sight as markets turn manic over the prospect of monetary policy tightening by the U.S. Federal Reserve. In brief (TL:DR)

  • U.S. stocks closed Friday with the Dow Jones Industrial Average (-1.30%), the S&P 500 (-1.89%) and the Nasdaq Composite (-2.72%) all down sharply as bears are in firm control over the monetary policy tightening narrative.

  • Asian stocks fell Monday as traders weighed concerns about tightening U.S. Federal Reserve monetary policy as the main catalyst for weaker sentiment.

  • Benchmark U.S. 10-year Treasury yields rose about two basis points to 1.77% (yields rise when bond prices fall) but remain somewhat below last week's highs, providing some respite for bond traders.

  • The dollar was steady.

  • Oil climbed with February 2022 contracts for WTI Crude Oil (Nymex) (+0.92%) at US$85.92.

  • Gold edged higher with February 2022 contracts for Gold (Comex) (+0.28%) at US$1,839.30.

  • Bitcoin (+1.05%) rebounded slightly out of the weekend to US$35,362 as Friday saw the liquidation of US$1.1 billion in leveraged positions.


In today's issue...

  1. The Individual Savior in Stonks

  2. Feeling Bearish? History May Provide Some Comfort

  3. Keep Calm and Crypto Companies


Market Overview

The U.S. Federal Reserve is expected to signal a March liftoff in interest rates and balance-sheet reduction later this year to help fight inflation after its Wednesday meeting.

Aside from the Fed, earnings updates from titans such as Apple will shape sentiment too following an uneven start to the reporting season which saw Netflix's disappointing numbers take the Nasdaq 100 sharply lower.

Technology stocks have borne the brunt of an equity selloff this year, while some less richly valued parts of the market have held up better.

In Asia, markets fell Monday with Tokyo's Nikkei 225 (-0.55%), Seoul's Kospi Index (-1.71%), Hong Kong's Hang Seng (-1.19%) and Sydney’s ASX 200 (-0.38%) all down.




1. Tech Individual Savior in Stonks

  • Individual investors appear to be buying as the worse January rout of stocks since the pandemic has seen US$12 billion of U.S. equities snapped up in the two weeks to last Tuesday.

  • While markets could be shaken out, individual investors appear to be taking a leaf out of a well-worn playbook, to buy the dip in anticipation of the turnaround.

Are you buying the dip? Or to use the Reddit parlance, BTFD? Individual investors appear to be buying as the worse January rout of stocks since the pandemic has seen US$12 billion of U.S. equities snapped up in the two weeks to last Tuesday, the most on record according to JPMorgan Chase (-1.75%). Losses may be piling for the individual favorites from Netflix (-21.79%) to ARK Innovation ETF, but individual investors who have bounced back from volatility and who are an increasingly important source of flow remain a potential safety net for drawdowns. U.S. equity markets differ from their Asian counterparts in that institutional flows dominate market movements, but since the pandemic has made stock traders of us all, American individual investors now make up to as much as 20% of all flows in the market. Institutional investors have seen their nerves frayed by looming rate hikes from the U.S. Federal Reserve and voting with their feet to lock in gains clocked earlier with the tech-heavy Nasdaq 100 already in correction territory and small caps on the brink of a bear market. More doomsday prophets on Wall Street are decrying the beginning of a crash and hiking fears that the Fed’s war on inflation could take out the economy with it. There are metrics however, those less given to hysteria than stocks, which suggest that the equity bull run may not be fully over. Despite the turmoil, risk premiums for high-yield (read junk) bonds have stayed muted, while stocks of firms with weak financing have significantly outperformed those with stable balance sheets. Which suggests that as scary as the selloff looks, it could just be an adjustment in in investor positioning, with individual swapping places with institutional investors. The Nasdaq 100, a benchmark for technology stocks, is down 12% in January and on course for its worst month since the 2008 Financial Crisis, while U.S. stocks as a whole have shed US$5 trillion in value since their peak last November. And while the hedge fund crowd has realized losses, unwinding leveraged positions and taking sharp drawdowns, individual investors are remaining stubbornly unbowed despite similarly mounting losses. Various factors have been cited as behind individual’s seemingly unreasonable bullishness, including repeated success from dip buying, an abundance of cash in bank accounts and the strength of corporate America’s earnings power. While markets could be shaken out, individual investors appear to be taking a leaf out of a well-worn playbook, to buy the dip in anticipation of the turnaround.




2. Feeling Bearish? History May Provide Some Comfort

  • Based on data going back to the 1950s, in the 12 rate-hiking cycles by the U.S. Federal Reserve, the benchmark S&P 500 has on average returned 9% during those periods, rewarding the faithful.

  • The coming months when markets are expected to get whipsawed could provide plenty of opportunities, especially if rates are hiked more than expected in March, which could see a very sharp correction.

Being an investor right now may require nerves of steel yet history may be on the side of equity bulls who are either using the opportunity to buy the dip on stocks or just hold their current positions in anticipation of a turnaround. Based on data going back to the 1950s, in the 12 rate-hiking cycles by the U.S. Federal Reserve, the benchmark S&P 500 has on average returned 9% during those periods, rewarding the faithful. And if history is any indicator, it’s that 2022 is likely to end better than it started for investors as a growing economy tends to support corporate profit growth and the stock market, regardless of rate hikes. In the 12 Fed rate hike cycles since 1954, stocks have actually risen at an average annualized rate of 9% and delivered positive returns in an overwhelming 11 of those instances with the one exception being the period after the U.S. abandoned the gold standard that backed the dollar. Most analysts surveyed by Bloomberg are not of the view that lingering concerns over tighter monetary policy or the spread of Covid-19 will be enough the stop the broader market from notching another positive year. According to data compiled by Bloomberg, on average, strategists project that the S&P 500 will finish this year around 4,982 points, or around 13% from last Friday’s closing bell. Data compiled by Strategas Securities based on aggregates from 1994, 1999, 2004 and 2015 suggest that even tech which is being battered at the moment, would typically see a surge of around 6.9% three months before rate hikes, and only slip by 1.90% in the three months after. There are other factors at play this year that could see significant volatility in the run up to the later part of this year, such as the U.S. midterm elections in November, with less certainty of the outcome and subsequent effect on policy changes likely to keep bulls and bears in a tussle for the ongoing narrative. Historically, the final three months of a midterm year and the first two quarters of the following year, known as the pre-election year (the next major U.S. elections are due in 2024) have been the strongest quarters for stocks over a typical 4-year presidential cycle. In pre-election years based on data going back to 1950, the S&P 500 has typically notched an average return of 32.3%. For investors who subscribe to this notion, the coming months when markets are expected to get whipsawed could provide plenty of opportunities, especially if rates are hiked more than expected in March, which could see a very sharp correction.




3. Keep Calm and Crypto Companies

  • BlackRock filed with the U.S. Securities and Exchange Commission to launch the iShares Blockchain and Tech ETF that would invest in companies involved in the “development, innovation and utilization of blockchain and crypto technologies.”

  • If launched, the BlackRock product would be the first crypto-adjacent fund in the world’s largest ETF issuer’s substantial lineup.

Amidst the US$1 trillion crypto meltdown, the world’s biggest asset manager BlackRock (-3.10%) is pushing ahead with plans to offer investors cryptocurrency-flavored exchange-traded funds. BlackRock, which manages some US$10 trillion in assets, filed with the U.S. Securities and Exchange Commission to launch the iShares Blockchain and Tech ETF that would invest in companies involved in the “development, innovation and utilization of blockchain and crypto technologies.” If launched, the BlackRock product would be the first crypto-adjacent fund in the world’s largest ETF issuer’s substantial lineup. With the U.S. Securities and Exchange Commission rejecting repeated applications to launch a physically-backed Bitcoin ETF, issuers have had to skirt around the regulator’s objections and launch products based on Bitcoin futures or thematic products such as BlackRock’s. The number of crypto-linked equity ETFs has grown to 15 in recent years, but remains small relative to other asset classes. Part of the reason of course that more products aren’t on offer is the SEC’s scrutiny over cryptocurrency ETFs which the regulator fears could be subject to manipulation. But as the SEC and the Biden administration move to provide more regulation of the cryptocurrency sector, a comprehensive framework could see a surge in the number of ETFs on offer. More conservative investors who want to gain at least some exposure to the cryptocurrency sector without necessarily being swept up in the volatility, may also prefer buying crypto-company ETFs, in what is widely known as the “picks and shovels” trade. Presumably, since crypto exchanges and other service providers make profits regardless of the direction that broader crypto prices move, investors would benefit from the growth of the industry as a whole, without necessarily suffering the volatility inherent in cryptocurrencies themselves. But in recent weeks, with the stocks of crypto-companies being hammered alongside other U.S. equities and with crypto prices in retreat, Coinbase Global (-13.38%), the only U.S.-listed crypto exchange, has seen its share price sink as well in close correlation with the price of Bitcoin. It remains to be seen if crypto-company ETFs can offer the full flavor of crypto, with none of the fat. Some analysts point to the unwinding of leveraged positions as a good opportunity to evaporate for some of the froth in cryptocurrency markets and consolidate to push fresh highs. Last Friday, some US$1.1 billion in crypto futures positions were liquidated. But the carnage does offer a silver lining – institutional investors. Institutional investors are typically loathe to enter a market at its peak and once the crypto markets have entered into capitulation mode, could see them return in droves because many have recognized that the asset class isn’t going away. Even as the dust settles, there are key technical indicators that show things could be about to look up for Bitcoin, with the fall in the benchmark cryptocurrency last Friday triggering a drop below the lower band of its trading envelope, which traditionally suggests that selling might be overdone.

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