Review Of The Week
Markets sell off as our traders make a profit
December 19, 2022
Another strange week; but a good one for our active strategies.
These are the strategies that can go short the market, and this week, nearly all were short.
The week started fairly upbeat and small gains were made until the FOMC meeting late Wednesday night. The initial reaction was to pair gains that had been made and maybe a little more.
However, stocks fell sharply on Thursday as traders took more note of what was said. Many fear that the Federal Reserve’s relentless interest rate hikes are tipping the economy into a recession. The irony of it is, the more likely the recession, the more likely the FED are to slow rate rising and the better that is for the economy!
This is almost certainly why we will see lots of volatility without any real direction at the moment. Good economic news will be tempered by higher rates, bad economic news might mean smaller hikes. This is a mess that will take another 6 months or so to push through, but we will. Once the rate hiking cycle is over, normal market reactions may begin to return.
On Thursday the Dow Jones Industrial Average fell 764.13 points, or 2.25%, to 33,202.22 — in its worst day since September as hopes for a year-end rally diminished.
The S&P 500 dropped 2.49% to 3,895.75, bringing its decline for December to about 4.5% and the Nasdaq Composite tumbled 3.23% to 10,810.
Losses continued into Friday with the Dow dropping another 500 points and the S&P500 falling another 1.68%.
The Nasdaq also fell meaning it is now down over 32% on the year making it one of the worst in its history.
Sadly the US weren’t alone this week though. Global stocks tumbled after a broad group of central banks raised interest rates and warned of further increases to come in the fight to tame inflation.
In Europe, the broad Stoxx 600 fell 3 per cent, its biggest loss since May. The US Federal Reserve, European Central Bank and Bank of England this week have all slowed the pace of interest rate rises, opting for 0.5 percentage point increases.
But investors were rattled by the hawkish tone of the meetings, in particular by comments from the ECB that “inflation remains far too high” and that rates would continue to rise by 0.5 percentage points “for a period of time”.
On Wednesday, the Fed ended a run of four consecutive 0.75 percentage point increases, bringing the federal funds rate to a target range of between 4.25 per cent and 4.5 per cent. However, Fed chair Jay Powell said: “It will take substantially more evidence to give confidence that inflation is on a sustained downward path.” The Fed also released its quarterly projections on where interest rates, inflation, unemployment and GDP will be in the coming years.
The central bank currently expects interest rates to be at 5.1 per cent at the end of 2023, suggesting the Fed will keep rates elevated even as recession risk mounts. The Fed’s mix of grim predictions and slowing interest rate rises have left some frustrated. “Either you believe your policy stance is ‘not sufficiently restrictive’ or you believe it is close enough that a [0.25 percentage point] hike is on the table for February,” said Steve Blitz, chief US economist at TS Lombard. “You cannot believe both.”
Seema Shah, chief global strategist at Principal Asset Management, said the market “still doesn’t seem to buy into the idea that the Fed isn’t going to cut rates through 2023 — there’s something about [Powell’s] messaging which isn’t quite resonating”.
Sentiment was further undermined by weak economic data, adding to fears of an impending recession. The US commerce department reported a fall in retail sales by 0.6 per cent month on month in November, the biggest drop in 11 months. The decline was more than the 0.1 per cent drop forecast by economists polled by Reuters. US industrial production declined 0.2 per cent in November.
The two sets of data indicate the US economy “has lost some serious momentum, with the resilience of consumers to much higher interest rates starting to crumble”, said Andrew Hunter, senior US economist at Capital Economics. Other data showed 211,000 Americans applied for unemployment aid in the past week. That was less than the previous seven-day period and lower than economists’ forecast, in a sign the tight domestic labour market could keep inflation elevated for longer.
The FTSE 100 fell 0.9 per cent as the BoE raised its rate to 3.5 per cent while warning that further rate rises were likely. Sterling slipped 1.9 per cent against the dollar to $1.22, down from a six-month high. The euro traded 0.4 per cent lower against the dollar at $1.06, erasing earlier gains.
We did hear some good news in the UK this week. GDP increased for the month of November by 0.5% after most expected it to shrink. Inflation also slowed, and the Bank of England suggested slower rate increases and better growth than expected for next year.
Sadly, nobody listened, and the FTSE fell with the rest of the world but we feel that now is a good time to buy into the UK for the long term. It is still incredibly undervalued compared to most other global indices. More on this next week.
The yield on the two-year German government bond, which moves with rate expectations, rose to its highest level since 2008 increasing our concerns about a government debt crisis. As this creeps into the foreground, we believe the FED will have to slow, if not pivot, because if they don’t then they will have to raise their national debt ceiling so much they’ll need a telescope to see it!
While we have seen an awful couple of days in the markets many of the portfolios on our platform have actually made money. Something we can offer that nobody else can, is active trading strategies that will short the market.
This week, most of our active strategies have been doing just that and it has kept many of our users from losing any money at all. Many of those shorts have been liquidated and it looks like most portfolios are moving back onto the long side of the market again.
Being short is a difficult thing to time, especially after the recent rally we’ve had; but many of our traders were ready for the drop and capitalised on it. We always say the perfect portfolio has a mix of passive tracking with active trading.
If you would like to speak to our team about building your own portfolio on TPP please contact us here.
Moving forward- a rising market, or one that trades in ranges would both be very good climates for our traders. Although most investments stagnate in ranging markets, on our platform our traders have a habit of buying at short term lows, and taking profit at short term highs. Therefore, whether the market stagnates within a tight range, or rises moving forward- we hope our traders and trading teams take advantage for our clientele.
If you have an underperforming portfolio elsewhere, or are sitting in cash waiting for an entry point- contact our team for a FREE consultation. Learn how to build a portfolio that aims to yield 2-4 x market performance per annum.
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Have a great weekend.
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