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Wasn’t This Supposed To Be a Quiet Week?

By:

Chief Strategist at Interactive Brokers

Last week was an eventful one, with an FOMC meeting on Wednesday and quarterly expiration on Friday.  The Federal Reserve did what was widely expected, speeding its taper and increasing the likelihood of faster rate hikes.  Markets initially liked Chairman Powell’s message, rallying after his press conference to largely eliminate losses seen last Monday and Tuesday only to fade once again as the week went on.  Friday’s selloff caused us to see yet another period of 3 day post-Fed trading that closed at a loss – though slight – and continued our perfect record of declines on post-Covid quarterly expirations. 

But then we were supposed to be finished with catalysts for the year.  Investors large and small were hopeful that they could enjoy a quiet holiday-shorted week[i] once we put those key developments behind us.  Yes, we are scheduled to receive GDP statistics on Wednesday and the PCE deflator (the Fed’s preferred inflation measure) on Thursday, but traders did not seem to be as focused upon that economic data.  Suddenly it all seems to matter, with major US indices down just under 2% as I write this.

The reasons for today’s declines are the result of weekend news, not simply a knee-jerk reaction to last week’s expiry.  Those results are mixed, as the table below shows:

 S&P 500 Performance after Quarterly Expirations
After ExpiryPoint Change  % Change
9/20/20214357.73-75.26-1.73%
6/21/20214224.7958.341.38%
3/22/20213940.5927.490.70%
12/21/20203694.92-14.49-0.39%
9/21/20203281.06-38.41-1.17%
6/22/20203117.8620.120.65%
3/23/20202237.40-67.52-3.02%

Today’s culprit was a worrisome set of headlines that we received over the weekend.  First, it has become increasingly apparent that the Omicron strain of Covid is becoming problematic.  It has been spreading rapidly in the New York area, and seemingly everyone around here knows someone who caught it.  Sporting and cultural events have been getting cancelled.  The good news is that it is proving to be a mild illness for those who are fully vaccinated; the bad news is that people will be on the move over the Christmas/New Year’s period, making it likely to spread to parts of the country with lower vaccination rates where the outcomes could be more severe. 

Then we had negative news on the fiscal side yesterday, when Senator Manchin (D-WV) announced on television that he could not support the proposed Build Back Better (BBB) bill as it is currently written.   Investors like fiscal stimulus, even if it is spread over a decade or more.  Goldman Sachs almost immediately cut its GDP forecast, leading many investors to question whether the Federal Reserve will be reducing its monetary stimulus even as the economy fails to grow as quickly as hoped. 

What we see today is a combination of risk aversion and profit-taking ahead of year end[ii].  Many investors are sitting upon profitable positions and may want to lock in some of those gains before the calendar turns.  Since many investors feared tax increases that might have been incorporated in the BBB bill, it is actually quite possible that the legislative failure actually reduced some investors’ desire to take profits this calendar year, but that appears to be a minority view this morning.  The lack of dip-buying (so far) and only mild outperformance in stay-at-home stocks tell us that traders are more concerned about protecting positions rather than opportunism. 

A fair number of traders and investors probably want to turn off their screens and not worry about their riskier positions over a period of holiday observance and vacations.  If that is the case, they’re taking action toward that goal today.  For those of us who will remain involved this week, it will behoove us to take the market’s newfound risk aversion into consideration over a week when volumes are likely to be thin. 

[i] Markets in the US and much of the world are closed on Friday, Christmas Eve, in observance of Saturday’s Christmas Day.  But that means that those of us who work in equity markets are losing out on a half-day off this week.  US markets usually close early on Christmas Eve and are fully closed on Christmas Day.  This year, no half-day.  And don’t get me started about next week.  Because New Year’s Day falls on a Saturday, US markets are fully open on New Year’s Eve and on the following Monday.  That means we have no customary day off.  Cue the world’s tiniest violins…

[ii] Eddie Murphy did a great job of explaining the phenomenon in the move Trading Places (warning: language)

Disclosure: Interactive Brokers

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