End of Week Re-cap
- Markets Down Following Fed Announcement
- Yield Curve Inversion Taking a Toll
- Disappointing Retail Report
- Quadruple Witching
Major market indices are down on the week, most of those losses coming in the wake of Wednesday’s Federal Reserve announcement. Heading into Friday, the S&P 500 is off 2.5%, Nasdaq Composite is off 3.2% and the Dow Jones Industrial Average has lost just over 2%. With today being a quadruple witching day, there is certainly a possibility for it to be another volatile day.
On Wednesday, the Federal Reserve announced a half point increase in short term lending rates. While markets were largely expecting that, the news that followed sent stocks lower. Although the Fed anticipates less aggressive rate hikes moving forward, their target level of 5 – 5.5% is slightly higher than many expected. The Fed also expects to reach that level in 2023 and hold rates their until 2024. That news dashed hopes that the Fed would begin easing sometime in 2023.
Although the Fed is raising shorter term rates, the yield curve remains severely inverted. Yields on 2-year notes are currently around 4.2% while the yield on the 5- year note is 3.61%. Those rates fall even further as you go out in time with 10-year notes yielding just over 3.1%. It probably shouldn’t come as too much of a surprise then that financial stocks in the S&P 500 are down 6.5% this month. Financial institutions often lend money out for long durations of time but are forced to borrow over shorter periods. Therefore, lending money at 3% but paying over 4% to borrow is taking its toll.
Yesterday, we received the most recent data on retail sales. November retail sales were down 0.6% compared with October (not adjusted for inflation). That marked the biggest month-over-month drop this year and comes during the all-important holiday shopping season. Auto sales were down sharply which could be a precursor for the housing market.
Finally, today is a quadruple witching. Options on stocks, stock indices, futures and futures options all expire today. The notional amount of options expiring today alone is a massive $4 trillion. December expiration is also commonly considered the last day of liquidity for the year as volumes tend to subside heading into the last couple weeks of the year.
The VIX is around 23.5 in premarket, well above its historical average. We have already seen the impact of volatility on markets this year. The Nasdaq has recorded 83 days of moves +/-2% which is the most it has seen since 2002 when it notched 84 days. Another volatile day isn’t out of the question, especially with the catalyst of quadruple witching.
Source: Forbes
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