The Fed Speaks, Markets Come Unglued
After the Fed raised the target for the federal funds rate on Wednesday from nearly zero to barely above zero, stocks rocketed higher and hopes pervaded the market that rising rates would somehow be good for stocks, just like zero-interest-rates had been good for stocks – that in fact anything is good for stocks – a theory proffered in great detail at every sell-side corner of Wall Street. But it was a half-day miracle.
Then everything came unglued.
It didn’t help that the propitious moment coincided with the expiration of stock and index options contracts – “quadruple witching.” And so the normally quiet last Friday before the holidays spilled lots of red ink in heavy trading volume.
The Dow dropped 367 points, for a two-day loss of 623 points, or 3.5%. Volatility is back: over the 14 trading days so far in December, there were 12 when the Dow moved 100 points or more between the close of one day and the close of the next, the most volatile December since 2008.
The Nasdaq dropped 2.9% since the Fed’s half-day miracle and ended once again below that magic 5,000.
The S&P 500 dropped 3.25% since the Fed’s half-day miracle. The market has become skewed to the downside: one stock among the S&P 500 made a new 52-week high on Friday and 37 made new lows.
“Expectations of a Santa Rally did not become reality this week,” explained Jill Mislinski of Advisor Perspectives to introduce this five-day chart of the S&P 500. It shows the Fed rally and the debacle since then. Note the spikes in volume at the beginning and end of trading on Friday:
Another week with no Santa Rally.
For the week, the Dow fell 0.8%, the S&P 500 0.3%, and the Nasdaq 0.2%. Wall Street soothsayers promised there’d be a Santa Rally. They brandished calendars and probabilities to bamboozle people into buying. We need it desperately: stocks have gone absolutely nowhere since September 5, 2014. We’re already sorely missing QE. And now we’ve got to deal with rate hikes!
Contrary to the hype that financial stocks would benefit particularly from rate hikes, they got hammered on Friday. They were the worst-performing sector in the S&P 500. The iShares US Financial Services ETF dropped 2.5%, the KBW Nasdaq Bank Index 2.9%. JPMorgan fell 2.8%; Wells Fargo 3.0%; Bank of America 3.1%; Warren Buffet’s finance and insurance empire Berkshire Hathaway 3.3%.
And junk bonds, the harbinger for the stock market? They’d gotten bludgeoned in prior weeks. A week ago, the iShares High-Yield Corporate Bond ETF HYG hit the lowest level since the euro-debt crisis of October 2011, and the days of 2009. Then the first major bond debacle happened since the Financial Crisis… It Starts: Junk-Bond Fund Implodes, Investors Stuck.
The junk-bond debacle frazzled investors.
But Wall Street soothsayers…