It’s the way markets are falling that’s really worrying
Consecutive days of losses, savage selling in the final hour of trade, and the reversal of intraday gains are all worrying signs on global markets.
Jan 24, 2022 – 5.00am
The size of the falls on global sharemarkets are enough to worry any seasoned trader.
But it’s the way markets are falling that has several experts disconcerted ahead of what may be a telling week for global financial markets, with the Federal Reserve’s two-day meeting and a host of big US earnings results likely to weigh on already poor sentiment.
Friday night’s trade on Wall Street saw the continuation of two of the more worrying trends.
The tech-heavy Nasdaq Composite fell 2.7 per cent, taking losses for the week to 7.5 per cent and adding to what is now its worst January since 2008.
The 15.5 per cent fall since its most recent high has the Nasdaq firmly in correction territory.
It’s hardly big news that tech stocks are clearly getting beaten up as the market prices in the impact of multiple interest rate rises in the US in 2022.
Still, last week the Nasdaq did something it hasn’t done for 20 years – it fell more than 1 per cent in every trading session of the week, albeit one shortened by a public holiday.
The last time that happened? Once in April 2000 at the height of the dotcom bubble bursting, and again in September 2001, just after the Twin Towers fell. The Nasdaq would go on to fall another 28 per cent following 9/11, bottoming about 12 months later.
US research house Bespoke Investment Group has tracked another fascinating trend since the start of the year: the sharp selling into the close of each trading day on Wall Street.
It’s hard to escape the sense that market confidence is cracking and sentiment has turned very bearish, very quickly.
The S&P 500 has lost about 0.16 per cent on average in the final hour of trade in January on Bespoke’s numbers, with Friday’s end-of-day dump putting January on track to be the worst month for final-hour trading since October 1987.
Ralph Acampora, one of Wall Street’s more famous proponents of technical analysis (otherwise known as charting), has also expressed particular concern about how the Nasdaq traded on Thursday night, when the index rose 2.1 per cent in the middle of the trading session, only to end down 1.3 per cent.
Bespoke said Thursday’s reversal was the first time in 20 years the Nasdaq Composite had posted an intraday gain of more than 1 per cent, only to close more than 1 per cent lower, on two consecutive days.
Even if you ignore the echoes of previous market crashes in this trio of trading pattern, it’s hard to escape the sense that market confidence is cracking and sentiment has turned very bearish, very quickly.
The savage fall in bitcoin – down 17 per cent in the last five days and almost 30 per cent in the last month – is another signal of poor sentiment, particularly among retail investors who have helped propel the market along for the last 12 months.
It’s only 12 months since meme stocks, tech companies and crypto were soaring in one of the frothiest periods of trading in recent history.
But with a staggering $US1 trillion ($1.4 trillion) wiped off the value of cryptocurrencies since bitcoin peaked in November, the fun has suddenly stopped.
With markets apparently trading on emotion, investors will need a catalyst to start focusing on fundamentals again. But the week ahead could provide more disappointment.
Microsoft and Apple report on Tuesday night and Thursday night respectively, and while these tech giants have held up reasonably well in this month’s sell-off, any whiff of a weak outlook is likely to be punished.
Then there’s the Fed’s two-day meeting on Tuesday and Wednesday nights; while the central bank won’t touch rates, it is likely to help clarify when increases are coming, and how many there will be.
The Fed finds itself in an awful position. While some investors might be hoping chairman Jerome Powell might become more hesitant to lift rates as market falls, surging inflation gives him no wriggle room. Indeed, some believe the Fed will need to go even harder than it is signalling.
“The Fed has never responded this slowly to an emerging inflation risk, and even today is signalling a benign hiking cycle,” says Bank of America’s global economist, Ethan Harris.
“If they are wrong, and inflation settles closer to 3 per cent than 2 per cent, it is bad news for both stocks and bonds.”
Investors worried by the echoes of crashes past, and predictions of 50 per cent falls from perma bears such as Jeremy Grantham, might take heart from Brad McMillan, chief investment officer for US firm Commonwealth Financial Network, who says the systemic crisis needed to deliver a 50 per cent fall is hard to see.
While economic conditions remain good and company earnings should hold up, McMillan concedes valuations will be under pressure as interest rates rise.
But if the S&P 500’s trading multiple fell from its current level of 20 times forward earnings back to its post-GFC average of 16 times, that would imply another 20 per cent down from here.
“As a reasonable worst case, absent another systemic crisis, this makes sense,” McMillan says.
And in the context of the 90 per cent gain in the S&P 500 that investors have seen since the market bottomed in March 2020, it’s arguably an understanding pullback – albeit a painful one.
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