On Wednesday, up a whopping eight points or 0.14%... the S&P 500 closed at an all-time record. Wednesday was the 250th of 252 scheduled trading days for 2021, meaning that the S&P 500 set a new record closing high 28% of the time this year. How long does that torrid pace continue? The index is up 27% year to date with two sessions left, which is impressive but not as impressive as 2019, nor 2013, while 2020 and 2017 were also very good years. Obviously we have become spoiled, as since that awful year of 2008, with both monetary and fiscal policy impacting free market price discovery across both debt and security markets, the S&P 500 has only suffered two years of negative returns. One of those years, 2013, the index only gave up 0.73%, leaving only 2018 at -6% as the single year that may have left a nasty mark on those who stayed invested in large-caps through any intra-year volatility.
Unfortunately, the pandemic has been setting records this week as well. Globally, new infections rose to more than 1M cases for a second consecutive day on Wednesday while according to Johns Hopkins University, new cases within the U.S. hit a new record of 265,427 on Tuesday. There can be no doubt that even as most medical officials seem to agree that the Omicron variant presents in most patients a less severe disease than had its predecessors or cousins, that there is and will be a drag placed upon economic performance. A number of entertainment venues have shuttered their doors for the season, while those confirmed as infected or showing symptoms have had to stay home from work. On Wednesday, a rough 17% of the NYPD (New York Police Department) called in sick, while the FDNY (Fire Department of New York) reported that approximately 20% of its EMTs had called in sick. This reduction in available labor can be extrapolated across at least the New York metropolitan area as well as elsewhere in the country. This slows corporate execution, as well as civil service to frustrating levels that could and probably will show up in Q4/Q1 GDP.
Wednesday's Markets
The key movement in financial markets came in the US Treasury yield curve as investors sold the long end of the curve. The US 10 Year Note paid as much as 1.558% early on Wednesday evening, before finding a bid. Currently, very early on Thursday morning, that benchmark yields 1.524%. T-Bills have trended more sideways than anything else which has steepened the slope of the curve.
US Ten Year Note/Three Month T-Bill yield spread
US Ten Year Note/Two Year Note yield spread
Readers will note that despite the rapid steepening of the curve over the past two session that both of our most focused upon spreads remain quite distant from their November levels, and while the Ten Year/Three Month spread has retaken its key moving averages, the Ten Year/Two Year spread not only remains very close to the lows of the chart, but has not yet closed in on any of those three moving averages. In short, this movement may have more to do with year end positioning than anything to do with a change in future expectations for either growth nor inflation. Of course all trends start somewhere, so this is something that we need to keep an eye on.
As far as equity trading is concerned. Wednesday trading rebounded ever so slightly from Tuesday's levels and remained at rather anemic levels for names domiciled at both the NYSE and Nasdaq Market Site. While the S&P Midcap 400 and Dow Transports showed modest gains for the session, almost everything else stayed rather close to home. Winners beat losers by a smidge at the NYSE, while losers beat winners by less than two to one at the Nasdaq. Declining composite trading volume topped advancing composite trading volume across names calling both exchanges home.
Interestingly, as Treasuries sold off, the four "defensive'' S&P sector-select SPDR ETFs finished in places one through four (out of 11) for the day, while cyclicals and growthy types took the bottom seven places. Real Estate (XLRE) took top honors, up 0.61%, while Energy (XLE) , this year's best performer (+53%), was the day's worst at -0.64%.
Because It Came Up
As far as tax loss harvesting or charitable giving and paying medical expenses to increase one's tax deductions are concerned, the last day of the year is the deadline. So, it is the trade date and not settlement date that matters when one is offsetting gains with losses. That said, there is a catch. The IRS will disallow tax losses if stocks sold are repurchased within 30 days of that sale.
In other words, if one takes a loss for tax purposes this week, then one is waiting until the last week in January to get back in, if this was the only reason for the sale. That may be fine. Over the past 20 Januaries, the S&P 500 has produced only nine winning months and 11 losers for a median return of -0.64%. While the "Santa Claus" rally often gets the new year off to a decent start, the month is by no means a sure thing.
While December can attract tax loss harvesting across losing names, the other side of the coin would be that for those looking to take profits on winners, but without sufficient offsetting losses, that this profit talking might intentionally be put off into January in order to delay the associated capital gains tax just in case that offsetting loss does present itself the following year.
The Future
Leuthold Chief Investment Strategist Jim Paulsen appeared on Bloomberg TV on Wednesday morning. On the trajectory of the S&P 500, Paulsen said, "A lot of people think we might give some of this (2021 gain) back as we enter the new year. That could happen, but I think we're going to maybe go above 5,000 during the first half of the year on excitement that finally we may be moving Covid from a pandemic to an epidemic and that inflation is moderating." Paulsen added... "One of the things I think is important for investors to focus on is: rates are going up, but until you get back above the 3% level (US 10 Year), the history of the stock market is awful encouraging for stock investors." Paulsen goes on to express some anticipation of a market correction at some point in H2 2022 as the Fed moves toward actually raising short-term rates, but that markets recover by year's end.
I see Paulsen's case. It's actually not all that far from my own. My expectation is for a correction or something darned close to it, probably late in Q1 2022 or early in Q2 2022, as the Fed wraps up its quantitative easing program, and speculation begins over when that first increase might be made to the target for the Fed Funds Rate. There are a couple of factors here, and I don't think any magical yield for the US Ten Year will have any specific impact on markets. Real not nominal rates will decide where the bid for equities may lie.
What matters will be how aggressive the Fed thinks it needs to be in order to corral consumer level inflation. I believe that inflation will moderate itself as Omicron burns through the population and supply chain behavior returns to something closer to normal. There is a chance that the FOMC hikes prematurely as these issues could resolve on their own. Forget worrying about inflation targets, prices in mid to late 2022 may be elevated from 2020, but express anything from deflation to disinflation in year over year terms... with a more hawkish posture in place at the central bank. You follow?
Now about the FOMC. Outgoing are Chicago's Charles Evans, Atlanta's Raphael Bostic, San Francisco's Mary Daly, and Richmond's Tom Barkin. Evans, Bostic and Daly are all thought of across economic circles as dovish. Incoming are Kansas City's Esther George, Cleveland's Loretta Mester, St. Louis' James Bullard, and Boston. Boston has not yet replaced Eric Rosengren on a permanent basis, and Boston's vote will be cast by Philadelphia's Patrick Harker until a new district president is in place in Beantown. George and Loretta are arguably considered to be the two most hawkish officials at the Fed, while both Bullard and Harker are seen as pragmatic, certainly not perma-anything in nature.
The wildcard here will be President Biden. The president has at least three positions to fill at the Federal Reserve Board of Governors. On December 17th, the president indicated that he would nominate three individuals by the end of the year. Uhm, just an FYI... it's the end of the year. Think the president will go hawkish in his choices? Me neither. There are going to be some live debates once these nominees get through the confirmation process. That will create volatility across both equity and debt markets.
Negative returns for 2022? It is a midterm election year. We will see increased volatility. Anything is possible, and it would not surprise me. Earnings growth will be tougher to produce as margins move sideways to lower. Corporate America is great at adapting to anything. My opinion? Our ranks - professional traders/investors - will thin this year. They always do once the going gets tough.
Stocks
Interestingly both Micron (MU) and Western Digital (WDC) turned in great days on Wednesday, fueled by the news that Samsung would be reducing memory chip production at its key factory in Xi'an, China due to an outbreak of Covid in that city. Then, Micron warned that lockdowns in that city would cause delays in shipments of its own DRAM memory chips. Let's see how day two of this news event impacts these names.
In other news, Walmart (WMT) announced that the retailer will now be able to dispense prescriptions for the new Covid antiviral pills developed by Pfizer (PFE) and Merck (MRK) at select stores in some states. Walmart is providing a website where consumers can search for a Walmart or Sam's Club pharmacy location that has either product in stock. These prescriptions will only be available for curbside pick-up or drive-thru delivery.
Don't Forget
Presidents Biden and Russia's Putin will hold a telephone call today to discuss European security in general and the Ukraine specifically. Something tells me regardless of outcome, everyone comes away talking about making significant progress.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 203K, Last 205K.
08:30 - Continuing Claims (Weekly): Last 1.859M.
09:45 - Chicago PMI (Dec): Expecting 61.9, Last 61.8.
10:30 - Natural Gas Inventories (Weekly): Last -68B cf.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 480.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
No significant quarterly financial scheduled for release.
(Walmart is a holding in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells WMT? Learn more now.)
