Two years of market swagger fades in week of stock market turmoil – .

Two years of market swagger fades in week of stock market turmoil – .

The worst period of stock market volatility in a year left a relatively light mark on benchmarks, all things considered. But for risk appetite, the impact has been deeper.
The nerves of traders have been repeatedly plagued, first by angst over the coronavirus and then with a new tone of hostility from Federal Reserve Chairman Jerome Powell. This added to one of the biggest challenges to date for the unbalanced buoyancy that defined virtually the entire era of the pandemic in the markets. Hedge funds weren’t waiting to see how things turned out. They bailed out at the fastest pace in 20 months.

Could this be another false alarm in a market that has tortured bears for two years? Yes, the big bounces on Monday and Thursday showed declining buyers to remain unfazed, and nothing in the economy or monetary policy offers an unambiguous reason for panic. But especially in light of the growing resolve to fight inflation among central bankers, many have sensed a change in the air after a year of virtually uninterrupted gains.

“The sale went a little deeper than I thought,” said Peter Cecchini, research director at Axonic Capital LLC by phone. “The feeling has changed. We have gone from what for 12 years was a falling buy market to a type of sell up market, because the Fed’s support, given inflation, will not be there. “

If this turns out to be a time of settling accounts for the markets, it comes at an inopportune time for those who have invested roughly $ 1 trillion in equity funds in 2021 in anticipation of yet another end rally. year. Large finishes have been a safe bet in the past: the market has recovered in every December except three since the global financial crisis.

Before a late-session rally on Friday broke the streak, the S&P 500 had registered moves of at least 1% over five consecutive days through Friday, a series of turbulence that had not occurred since November from last year. Friday’s session was a microcosm of turmoil, with the index rising 0.7% before dropping 1.8% to its lowest level to end up 0.8%. During the week, the Cboe volatility index averaged over 28, its highest level since January.

As the S&P 500 lost 1.2% during the week, the pain was acute in the speculative space – companies that have just been listed or are trading at nosebleed valuations – or the two. They had all prospered under the largesse of the Fed. Faced with a relatively hawkish Powell for the first time in three years, these once coveted actions are suddenly out of favor and their valuations are increasingly difficult to justify.

The Renaissance IPO ETF (IPO ticker), which tracks recent initial offerings such as Coinbase Global Inc. and DoorDash Inc., fell 11% in five days, the highest since March 2020. A basket from Goldman Sachs Group Inc Extremely expensive software stocks like Asana Inc. also suffered its worst week since the dark days of the pandemic bear market, plunging 12%.

The carnage was a blow to those who had crammed into these risky bets. Growth specialist Cathie Wood saw her flagship product ARK Innovation ETF (ARKK) lose 13% in five days.

Hedge funds, which Goldman Sachs said counted expensive tech stocks for a third of their holdings at the start of the fourth quarter, are quickly unwinding their positions. They emptied their shares at the fastest pace since September on Wednesday, according to data compiled by Goldman’s Prime Broker show. Their net leverage, a measure of industry risk appetite that takes into account long versus short positions, fell the most since April 2020.

At Morgan Stanley, hedge fund clients reduced their net leverage by about 6% over the past month. That’s a departure from what the company says is generally risk-based positioning until the end of the year.

“With the Fed meeting in about two weeks and the uncertainty around omicron, liquidity is likely to be difficult. This is not an ideal backdrop for equity risk, ”said Mike Lewis, head of US equity spot trading at Barclays Plc. “People just want to get through December. No one wants to ruin their year in the few days left until the home stretch. ”

As brutal as it is, the bargain hunters have remained for the most part fearless. Day traders, the steadfast ally of this bull market, are buying the downside again, taking hold of stocks at a pace that JPMorgan Chase & Co. said was unprecedented. Lower buyers appeared on Friday night, pushing the S&P 500 up more than 30 points in the last 10 minutes of trading.

Peter van der Welle, strategist in the fundamental multi-asset team of Robeco Institutional Asset Management, echoed this sentiment, pointing to a context in which earnings will grow “in double digits” next year. The company recently bought Russell 2000 futures in part because small cap stocks are more attractive than large caps.

“We have been waiting to pull the trade trigger for a few weeks. We were waiting for the moment to buy the trough, ”he said. “We’re not too worried about the impact of the omicron variant. ”

But a feeling of apprehension sets in. Traders look to the options market for protection. The put / call ratio for Cboe shares this week hit its highest level since July.

Meanwhile, investors were dropping the biggest names in a clip ever for two decades. The Bloomberg US Pure Trading Activity portfolio, which is made up of long stocks with the highest turnover compared to those with the lowest turnover, had its worst week since 2001.

With the S&P 500 up 21% in 2021, one might conclude that the year has been easy to navigate. The truth is, the post-pandemic world is so hard to predict, and many professional forecasters have got it wrong in the market.

Friday’s jobs report added to a long list of confusing data that baffled investors. And the emergence of omicron further darkens the economic outlook, fueling monetary policy unpredictability and market volatility, according to Olivia Engel, director of active quantitative equity investments for State Street Global Advisors.

“It’s been quite remarkable to see the magnitude of some of the reversals – just looking at simple things like value versus growth, trade has really wobbled last week, risk versus risk has been. huge, ”she said. noted. “The outlook for inflation is a little more complicated by omicron because you just don’t know how people are going to react to the threat. ”


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