Volatility has certainly returned with a vengeance and days are either complete risk on or risk off. For example, we had a big swoon on Thursday after a poor earnings report from Facebook (now Meta Platforms, Inc.). The stock fell roughly -26%, wiping out over $250bn of market-cap in a single day. You only have to go back to 2015 to find a time when the entire company was worth what it lost on Thursday.
Investors also fretted that other companies in the social media business were at risk. For example, Snap was hit with a -23% loss. Then the markets rallied on Friday after Amazon reported solid earnings. It’s stock surged +15% while Snap surged roughly +60% after its own robust earnings announcement. Crazy!!
In terms of economic data, the week was all about jobs. On Wednesday we got the ADP report for January and it was ugly. It showed -300k job losses last month, as you can see below.
Of course, much of the loss appears COVID related. After all, at least 20 million Americans were infected with omicron in January. The negative report is less surprising than the fact economists thought the number might come in up over 100K.
Then on Friday the monthly payrolls report was released. Economists expected a weak number, after all, Omicron was ragging in January, right? Consensus expectation was for growth of just +50K, but some thought we’d see losses of over -200K (yea Goldman, that’s you!!). One firm was at -400K.
Well, the actual number was +467K, and just to pile on a bit, the numbers for November and December were also revised up by 709K combined. So much for the Omicron headwind.
Other highlights of the report:
– The unemployment rate ticked higher as more workers re-entered the job market.
– Wage growth was strong – earnings were up +0.7% in January and are up +5.7% year-over-year.
You have to squint at the chart below, but we are getting close to recouping all the job losses from the COVID crisis. Total employment is now down just -2% from February 2020. The rebound is stunning in comparison to the financial crisis of 2007-2009.
Central Banks Rattle the Bond (and other) Markets
Corporate earnings and labor reports certainly contributed to volatility, but Central Banks also played their part. On Thursday the Bank of England raised rates for the second consecutive meeting, the first back-to-back move since 2004.
This was largely as expected. The surprise came from the fact that the decision was split 5-4. Dissenters favored a half-point move, not a quarter-point hike. This reinforced the idea that most central banks are way behind the inflation curve.
The European Central Bank was also hawkish, at least for them. They didn’t hike rates, but quite unexpectedly the head of the ECB, Christine Lagarde, refused to rule out raising interest rates this year. She said the bank had “unanimous concern” about soaring prices. The market moved quickly to price in two rate hikes in 2022 and longer-term yields surged.
Back to the U.S. – of course, the hot jobs report is getting everyone excited about a possible half-point hike at the Fed’s next meeting on March 15th and 16th. Odds now stand at about a 1 in 3 – up significantly from a few days ago.
The Fed is in a tricky spot. GDP growth for the first quarter could actually be flat. The Atlanta Fed’s early projection points towards just +0.1% growth in 1Q22.
Granted, this estimate has a history of swinging around a lot, but it’s notable.
And we should not forget that for all the talk about inflation, the Fed is still buying a bucket load of bonds every day under their stimulative quantitative easing program. This week their balance sheet hit another new record of $8.87 trillion. Even the most ardent deflationist thinks this has to end.
The Magazine Cover Indicator
I wouldn’t be shocked if PhD theses have been written on the strategy of using magazines as a contrary indicator. Basically, if a topic makes it to the cover of a popular magazine (or above the fold back when people read papers) then the idea was fully discounted in the market. Furthermore, it might actually be time to bet the other way. The classic example is the ‘Death of Equities’ cover back in August 1979.
Stocks had been a terrible investment in the 1970’s and Businessweek captured the popular view in this ill-timed article. They didn’t hit the market low, but they came close.
Another good one came in 2019. Obviously, they shouldn’t be expected to foresee COVID and everything that meant for inflation in 2021 and 2022, but it did a nice job of capturing the general market view, and certainly the deflation trade was fully in market prices.
It’s not just Businessweek. The Economist had this doozy just before oil prices surged.
Or their bullish piece on the U.S. dollar right before it slumped.
I’d argue all this isn’t a case of ignorance or malevolence. Magazines simply reflect what everyone is thinking. And if everyone is thinking the same thing then the idea is fully reflected in market prices. It might even be time to think about the pendulum ultimately swinging the other way.
Well, The Economist is at it again!!!
At a minimum they are reflecting the consensus bet – rates are going higher. But is there a contrary bet here? It will be fun revisiting this in twelve months!!
Charts We Found Interesting
1. COVID cases in the big 4.
2. Crude oil trading over $92/barrel is due in part to this – maybe OPEC doesn’t have much spare capacity after all.
3. Car inventories have never been lower relative to sales.
4. Closing California’s Diablo Canyon nuclear plant is equivalent to removing every windfarm (and some solar) in California.
5. January 2022 was the driest January on record across most of central CA & pockets of interior NorCal as well as most of Nevada, Utah, and western Colorado.
6. On this day in 1789 George Washington was elected as first President of the United States. 1789 inaugural button honoring Washington as ‘Father of the Country’.
Have a good weekend.
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