Rate of interest fears have been blamed for the latest fairness weak point, however different elements play a task
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“We all felt comfortable that Covid is finished or manageable, and it could still turn out to be the wild card,” Peter Tchir of Academy Securities told me. “Nobody wants another year of lockdown.”
This week it looked like inflation / yield worries were replacing Covid as the primary market risk, and as a result, stocks have moved rapidly as investors tried to assess the impact of higher interest rates.
Finding that out is hard enough, but now we’re reminded of an uncomfortable truth: Covid didn’t go away.
“The Paris story wasn’t what the market wanted to hear,” Interactive Traders’ Steve Sosnick told me, referring to France locking up Paris again because he was concerned about the spread of new strains of the virus.
“The market wasn’t in the mood for more bad news,” he told me. “The bond market wasn’t particularly happy with Powell’s comments, and it didn’t help you having one [quadruple witching] procedure [Friday]which likely resulted in more volatility. “
That nasty truth – that Covid hasn’t gone away – is a threat to a pillar of the market rally to new highs: the so-called “reflation trade,” which associates companies with the reopening of the US economy – transportation, travel / leisure have industrials all spearheaded the market rally.
Some reopening stocks, especially energy stocks, have stalled this week on concerns about additional locks:
Shares reopened this week
- ExxonMobil down 8%
- American Express down 4%
- Advices down by 2%
- Disney down 3%
While the broad reopening sectors are still on the upswing this week, by the middle of the week they are far from their highs:
This week’s reopening trade:
- Airlines (JETS) up 1.5%
- Homebuilders (XHB) are up 1.6%
- Cars (CARZ) increased by 1.5%
Value stocks are now momentum stocks – or are they?
The retreat was particularly baffling because value stocks (energy, industry, banks, some consumer names) that haven’t reached growth (technology) in a long time have suddenly stolen the limelight. Value stocks had become momentum leaders: the new high list was regularly filled with banking and industrial stocks.
Could another outbreak jeopardize the reopening sector’s profits? “Americans need to be reminded that we are not the world,” Sosnick noted. “It’s not just Europe, things are falling apart in Brazil too. Americans are all thinking about their upcoming vacation, but the rest of the world may not.”
The market is confused about rate hikes
The biggest problem for the markets, however, is the right attitude towards higher rates.
“We can’t find out whether or not higher interest rates are okay for the markets,” Leuthold’s Jim Paulsen told me. “I still feel that at the end of the day, the mere growth numbers we will see will determine the day. The growth will be so strong that some inflation will not be that important.”
While the decline in big cap tech stocks has been relatively small this week, the hugely popular “thematic” tech sector (clean energy, games, cloud computing, cybersecurity, and Cathie Woods Ark Investments) has suffered greater damage across the board Week.
Thematic tech ETFs this week:
- Clean Energy (ICLN) down 11%
- Invesco Solar (TAN) down 11%
- Video Gaming (GAMR) down 7%
- Cloud Computing (WCLD) down 4%
- ARK Innovation (ARKK) down 5%
- 3D printing (PRNT) down 3%
“It seems like everything is speeding up.”
How can you understand all of this? Given the confusing fundamentals, is this crazy deal perfectly understandable, or does something else come into play?
One issue that has been raised repeatedly by the trading community is hyper-acceleration in retail – trends that used to take months to play out now play out in a matter of days or even hours.
This is not an illusion, Seth Merrin, founder and executive chairman of Liquidnet, a global institutional trading network, told me.
“Gamestop is positive evidence. Back in the dot-com craze, your porter gave you tips on stocks. Now everyone is sitting at home and watching Reddit. Putting money in Bitcoin, Dogecoin. It’s messing up the market. They’re professional information traders. ” They can spark a firestorm in retail stocks that shifts trading in ways professional traders never even thought of, “he said.
The focus, according to Merrin, is the fact that more people have access to data that used to be managed only by experts. “It’s not the speed in retail that makes the big difference, it’s access to data,” he told me. “People can access, process and react to data. In the past, this data was only available to high-frequency traders. Now many more people can benefit from it.”
Where will this end? Will we all be high frequency traders in the near future? Will I have Artificial Intelligence? [AI] this is trading my stocks interacting with your AI, and my AI will be about as good as the best high frequency traders?
“Yes,” said Merrin. “Everyone in the world is not going to be a citadel, but since everyone is able to process more data, there is a chance they will get in and out of positions more.”
Jim Paulsen also noted that Covid – and the response to the virus – has also changed the way people see the world.
“If you look back on what happened in the pandemic, we had the biggest drop in GDP, the biggest job loss in history. And the Fed and Congress reacted with ferocity almost immediately. When the Fed and Congress suddenly responded accelerated time, why shouldn’t traders? “
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