Wall Street has continued to rattle off some new record highs in October, but the absence of one major index from the list is starting to become glaring, according to Raymond James. Quantitative and technical strategist Javed Mirza pointed out in a note to clients that the Nasdaq 100 has not set a record high since July. The relative struggle of that tech-heavy index is possibly a sign that the broader bull market is on the verge of entering into a new phase — and getting close to a peak, according to Mirza. “The Nasdaq 100 is a good proxy for the more ‘growthy’ areas of the market and this negative divergence suggests that Portfolio Managers have begun to shift away from the more growth-oriented areas of the market, consistent with a shift into the late stages of the current 4-Year Cycle. The Nasdaq 100 has failed to reclaim the highs it set in July, despite the S & P 500 , TSX Composite, and Dow Jones Industrials all scoring new all-time price highs,” Mirza wrote. .NDX 6M mountain The Nasdaq 100 has not set a new record high since July. On Monday, the Nasdaq 100 was trading about 2% below its record close. Technical indicators suggest that it won’t close that gap any time soon. “The Nasdaq 100 just triggered a new short-term ‘mechanical sell’ signal, diverging from the other North American equity indices,” Mirza said. The Nasdaq 100’s slump is not the only factor pointing to toward a new phase for the bull market. Other notable data points include the Cboe Volatility Index (VIX) making higher lows and the Canadian TSX Composite outperforming the S & P 500, while WTI crude pushing above $94 per barrel would be a fourth point, Mirza wrote. To be sure, even the late stage phases of a bull market can last for quite a while. Mirza does say that the “path of least resistance” is still higher for stocks overall heading into 2025.
A bitcoin top could signal trouble for stocks – and a shift in market leadership, according to Stifel. According to Barry Bannister, Stifel’s chief equity strategist, there’s evidence the cryptocurrency may be peaking, which could lead to a pullback in investor sentiment, weaker Big Tech stocks, and a rotation into value, he said in a note Wednesday. “Bitcoin & Nasdaq 100 reflect the speculative fever fostered by cheap money after dovish Fed pivots, such as occurred 4Q 2023,” Bannister said. “We show that if Bitcoin reflects euphoria after a dovish Fed, it is notable that Bitcoin (and the fever) may be peaking.” BTC.CM= YTD mountain Bitcoin, YTD “Investor mania around bitcoin coincides with extreme equity bullishness, which typically means equity indices are overbought and vulnerable to pullbacks,” he added. Bitcoin hit a new all-time high on March 14 after running up 71% since the start of the year, and has been trading in a roughly 7% range since then as investors take profits and digest the recent gains. Shortly after, on March 28, the S & P 500 reached a new intraday all-time high . .SPX YTD mountain S & P 500, YTD If was indeed its peak, that could mean a weaker Nasdaq 100 for six months, Bannister said. Other implications he highlighted include weakness in Big Tech Nasdaq stocks and a pullback in investors sentiment with a year-over-year change in S & P 500 performance. Additionally the S & P 500, which is cap weighted, could struggle against the equal-weight S & P 500 for about six months. “When the equal-weighted S & P 500 out-performs the S & P 500, then value tends to out-perform growth,” he said. —CNBC’s Michael Bloom contributed reporting.
Visitors around the Charging Bull statue near the New York Stock Exchange on June 29, 2023.
Victor J. Blue | Bloomberg | Getty Images
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All-time high The S&P 500 closed at an all-time high on Friday, rising 1.23% to close at 4,839.81, setting fresh record intraday and closing highs from January 2022. The Dow Jones Industrial Average, which set its own record at the end of last year, added 395.19 points, or 1.05%, to end at 37,863.80. The Nasdaq Composite advanced 1.70% to 15,310.97.
Macro triggers The U.S. will be releasing two big economic reports this week which could give fresh clues to which way the Federal Reserve could move. On Thursday, the Commerce Department will be releasing its initial estimate of fourth quarter gross domestic product, and on Friday, the December reading of the personal consumption expenditures price index — the Fed’s favored inflation gauge.
DeSantis out Florida Gov. Ron DeSantis dropped out of the 2024 presidential race two days before the Republican New Hampshire primary — endorsing front-runner Donald Trump, just as other candidates did after they cut their campaigns.
Dispirited travel A federal judge’s order blocking a $3.8 billion-dollar deal that would have JetBlue Airways purchase rival Spirit Airlines leaves Spirit with an uncertain future — hitting budget travelers and the Arnold Palmer Regional Airport, an hour outside Pittsburgh, hard.
[PRO] Earnings season Tesla, Netflix, Intel and Alaska Air are among nearly 70 S&P 500 companies that are scheduled to report earnings this week. Just 69% of the roughly 52 S&P 500 companies that have reported, according to FactSet, have surpassed expectations.
The S&P 500 benchmark hit fresh all-time intraday and closing highs on Friday, and by some technical indicators, entered a bull market.
A clutch of fourth-quarter earnings and several key macroeconomic data points will provide fresh insights and catalysts for investors this week.
Not too long ago, recession talk dominated Wall Street predictions even as the U.S. equity markets roared back in 2023 after a lackluster 2022.
Even the Fed’s own staff were expecting a downturn after the central bank raised interest rates 11 times by a total of 5.25 percentage points to stymie rising inflation rates in the most aggressive cycle since the early 1980s.
The outsized rally in the major technology counters has been among the big drivers for this emerging bull market — seemingly impervious to any broader geopolitical unrest globally and deepening Washington turmoil ahead of U.S. presidential elections in November.
The same could well happen this year, extending the rally in the U.S. market — though some may still have lingering doubts, almost suspicious that further gains may be too good to be true.
Single-stock ETFs were first introduced in Europe in 2018. There are now nearly four dozen single-stock ETFs in the U.S., many of which track the so-called “Magnificent Seven” stocks — Apple, Microsoft, Alphabet, Nvidia, Amazon, Tesla and Meta. Other names on Morningstar’s list of single-stock ETFs include Coinbase and Alibaba.
Collectively, single-stock ETFs have about $3.3 billion of net assets, according to Morningstar.
The growth of these single-stock ETFs, which are leveraged, is not particularly surprising, given that the Nasdaq is up more than 40% this year and big-tech stocks in particular are soaring. But they’ve likely earned a long-term spot in the market.
Single-stock ETFs “are here to stay,” said Bryan Armour, director of passive strategies research for North America at Morningstar. The strategy “taps into some of the gambling mindset that exists in markets,” he said.
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Here’s a look at other stories offering insight on ETFs for investors.
Here’s what investors need to know about the growth of the single-stock ETF market and where it could be heading.
There are 45 single-stock ETFs in total, according to Morningstar, from a handful of providers including Direxion, AXS, GraniteShares and YieldMax. These ETFs follow bull, bear or option income strategies.
The largest by asset size is the Direxion Daily TSLA Bull 1.5X Shares, which tracks Tesla. In July, it became the first of its kind in the U.S. to surpass the $1 billion asset mark.
The second-largest single-stock ETF by asset size is the YieldMax TSLA Option Income Strategy ETF, which had around $841 million of assets at the end of November, according to Morningstar.
In third place by asset size is the GraniteShares 1.5x Long NVDA Daily ETF, which tracks Nvidia and has soared in a year dominated by artificial intelligence optimism and the gains for chipmakers. It had about $245 million in assets at the end of November, Morningstar data shows.
To achieve their stated returns, leveraged and inverse ETPs often use a range of investment strategies. This can include swaps, futures and other derivatives as well as long or short positions, according to a FINRA explainer.
Rich Lee, head of program and ETF trading at Robert W. Baird & Co., expects to see more single-stock ETFs with an options overlay strategy and income component. YieldMax offers several of these ETFs that seek to generate monthly income by selling/writing call options on single company stock exposures.
There is continuous appetite for single-stock ETFs, and there will continue to be innovation, combining themes and exposures under the ETF wrapper, Lee said. “It’s a way to get quick exposure with leverage.”
While the number and assets within these ETFs has mushroomed, there have been duds. Single-stock ETFs tracking Nike and Pfizer — the former whose shares are close to flat this year and the latter whose shares are down 45% — among a few others, closed down. Some stocks are too bland to get investors riled up one way or another, Armour said. If an ETF can’t get enough traction, investment managers have to decide where to focus their resources, he said. It’s something for investors to keep in mind: What’s on the market today may not be in a few months.
Performance is all over the map. The Direxion Daily TSLA Bull 1.5X, for instance, had a total one-year return of about 12% through November, but it’s up about 148% year to date through Dec. 15, according to Morningstar. The GraniteShares 1.5x Long COIN Daily ETF, which tracks Coinbase, had a one-year return through November of about 206% and returned about 488% year to date through Dec. 15, according to Morningstar.
Not surprisingly, single-stock ETFs that take a bear strategy have seen negative returns of late.
But performance over time isn’t really the point.
The market for these vehicles is mostly traders and individual investors with an extremely high risk tolerance. There are other ways to gain leverage, without needing to pay fees in the 1% range, but for some more sophisticated retail investors who don’t have experience with leverage, a single-stock ETF can be a safer option, Armour said. “It’s just not a smart long-term strategy. It’s a very costly way to gamble in the stock market.”
These vehicles are appropriate for sophisticated retail investors and professionals that are willing to take a short-term view and are willing to monitor their positions daily, said Ed Egilinsky, head of sales and distribution and alternatives at Direxion.
“These are not buy-and-hold products,” he said. “If someone is looking to buy something and not pay attention to it, this is not the vehicle.”
The U.S. Securities and Exchange Commission issued an investor warning in August, reiterating the extra risks inherent to single-stock ETFs. “Because leveraged single-stock ETFs in particular amplify the effect of price movements of the underlying individual stocks, investors holding these funds will experience even greater volatility and risk than investors who hold the underlying stock itself,” the SEC said.
“You definitely have to understand what investing or hedging investment you’re trying to achieve with these products,” Lee said. “For a lot of these leveraged products, people are using it to get intraday exposure or use it for some sort of hedging.”
Which stocks could be targeted for the next hotly traded single-stock ETF?
Success is determined in part by assets, daily volume and scale, said Egilinsky. While he declined to be specific about where Direxion is next looking to add to its single-stock ETF lineup, he did say AI is a hot area. “We’re going to let this play out over time. It’s still in its infancy stages and we’ll continue to look for single stocks that make sense for us to bring to the market.”
Another earnings season is just around the corner, and Wall Street views some stocks as better positioned heading into it. The Nasdaq Composite reigned as the clear winner among the three major averages in the first quarter of 2023, surging nearly 15% after the worst year for the index since 2008 . The gains came from beaten-up technology stocks that struggled last year as interest rates rose and yields pushed higher, denting their lofty valuations. The Nasdaq-100 , a narrower subset of the Nasdaq Composite, also suffered keenly in 2022, with a decline of nearly 33%. It’s up 18% in 2023. With major tech stocks on a tear, the first-quarter earnings season will offer a first look into how these companies are truly faring. Amid this backdrop, CNBC Pro used FactSet data to find the stocks Wall Street is most bullish on heading into the season. The screen searched for Nasdaq-100 members that met the following criteria: Earnings per share estimates up 5% or more in past three months Average price target up at least 10% in past three months Of the group, Booking Holdings has seen the largest increase in estimates for earnings per share over the past three months, up 38.7%, while its price target has risen 18.7%. The travel stock has gained about 29% in 2023 following a 16% slump last year. Evercore ISI recently named the company among its list of stocks that can outperform in any economic landing. Another top contender heading into earnings season is Meta Platforms . Shares have surged more than 72% in 2023 as investors veer back into technology stocks and praise the company’s focus on efficiency . Most recently, the Facebook parent announced a new round of layoffs slated to hit at least 10,000 workers . EPS estimates have risen 27.4% over the last three months. The stock has also seen the largest price target increase over the last three months, up 50.5%. META YTD mountain Meta Platforms shares so far this year A handful of chip stocks also met the criteria, including GlobalFoundries and Analog Devices . Semiconductors have bounced back in the first quarter, with the S & P 500 industry group tracking the space gaining about 34% this year. Earnings per share estimates for both stocks are up 10% and 13.4%, respectively, within the last three months. Truck maker Paccar and Cadence Design Systems also made the list. — CNBC’s Chris Hayes contributed reporting.
The tech sector was a bright spot last week as the banking crisis rocked markets. The Nasdaq Composite was up 4.4% over the week, while the Nasdaq 100 — which includes the index’s largest non-financial companies — was 5.8% higher. Big tech and semiconductor stocks such as Nvidia and Microsoft were up around 12% over the week, while AMD soared over 18%. Some investors started to view tech as something of a safe haven , as bond yields dropped and amid uncertainty over whether the U.S. Federal Reserve will continue with its rate hikes following the banking crisis. So should you buy into the tech rally? Market pros urge caution — but think some stocks are set to outperform. ‘Creeping back’ into the sector Tech investor Paul Meeks, portfolio manager at Independent Solutions Wealth Management, said he’s “creeping back into the sector” after advocating an underweight position in it for a long time. “I do think within technology, there are some pretty interesting, very specific stories,” he said. He likes semiconductor stocks in Europe, including ASML , and is also focusing on artificial intelligence names, such as Nvidia , Microsoft , and Chinese tech firm Baidu . Hedge fund manager Dan Niles, meanwhile, said he likes Meta as it has a “strong” core business, with good user growth and engagement. Its Reels product is also holding up against Tik Tok, he told CNBC Pro Talks last week. However, he cautioned that a lot of tech companies are going to be struggling with cost efficiency going forward. Like Meeks, Niles is also bullish — but selective — on semiconductor stocks. He highlighted that the sector dropped last year on collapsing demand as countries reopened following the pandemic. But in terms of the smartphone and PC corners of the market, “it’s gotten bad enough and it can start to turn with generative AI as a nice kicker on top of that,” Niles added. He said he owns Intel and Nvidia, with the former “starting to close the gap” in manufacturing with Advanced Micro Devices and Taiwan Semiconductor Manufacturing , which should improve its outlook. Nvidia is also the “biggest beneficiary of generative AI” as a lot of graphic chips will be needed, Niles added. Is tech a safe haven? But tech is not out of the woods yet, according to Meeks. “The way that U.S. tech companies distinguished themselves to the upside with their first-quarter reports and … forward guidance is by how many people they could fire — and that is not a recipe for growth,” he told CNBC’s “Street Signs Asia” on Friday. He added that the banking crisis has led to market talk about halting or declining interest rates, and “of course, that is a recipe for greatness for tech stocks.” “It’s all about the interest rates, potentially going down after a full year of them rising swiftly and aggressively. But I don’t think that the fundamentals and technology have changed for the better, or not materially,” Meeks said. Tech firms in particular are vulnerable to rising rates as future profits become less valuable. Financial services firm BTIG said it believes that tech stocks have become something of a “rotation beneficiary given the recent events and rising odds for a hard landing.” “If you are managing money, and you are selling high-beta cyclicals but have a mandate to be fully invested, that money is going to find its way into more perceived safe havens. While we don’t think FANG+ names are immune to weakness, they are perceived as safer in an economic downturn than Energy, Industrials, Financials, etc,” the bank’s analysts wrote in a March 16 note. However, they warned that once these “rotations” have run their course, there could be renewed weakness in tech. — CNBC’s Michael Bloom, Sarah Min contributed to this report.
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Based on the initial market action of 2023, it appears investors’ New year’s resolutions were something like this: Keep Big Tech in the penalty box, place some bets on foreign-stock outperformance, while feasting on bonds of all kinds to capture healthy yields and maintaining some hope that the elusive soft economic landing remains possible. No one needs the reminder that turn-of-the-year resolve often dissolves in the face of changing circumstances. Recall that at the start of last year, the popular bet was for a smooth and painless rotation from expensive growth stocks to financials and cyclicals. It didn’t last: The S & P financial sector trounced utilities by seven percentage points in just the first week of 2022. From that point through the rest of the year, utilities outperformed financials by a yawning 17 percentage points. Still, the markets have revealed some clear preferences in the early going, some of which have simply carried over from 2022. These include the continued unwinding of the massive valuation premium and over-optimistic investor sentiment in the Nasdaq giants. Tech unwind continues Underway since November 2021, this deflation of the tech favorites entered a new phase recently with the topping pattern in Apple shares and urgent liquidation in Tesla , which has cost it some three-quarters of the 1,800% surge the stock enjoyed in the two years leading up to its late-2021 peak. It’s been common to cast this action as largely a response to higher interest rates, which reduce the present value of distant cash flows. But rates were always just part of the story both on the way up and down. In fact, since the 10-year Treasury yield peaked on Oct. 24, the Nasdaq 100 is down nearly 4% while the equal-weighted S & P 500 has gained 8%. Sinking profit forecasts colliding with still-rich valuations tell the more relevant story. Since mid-2022, consensus forecast 2023 earnings for Amazon have declined by 30%. For Alphabet , it’s close to a 20% drop. These companies once had reliable-seeming growth when growth was scarce, they over-hired believing the good times would last and analysts over-extrapolated the pandemic-era growth surge. One could argue that the greater part of the tech reckoning has by now occurred. The forward price/earnings ratio on the Nasdaq 100 has indeed tumbled from 31 a year ago to under 21 today. Some stocks that led the way lower arguably became thoroughly washed out and inexpensive. Some investors clearly came into the year feeling that, for instance, Meta Platforms and PayPal fell into this category of busted “de-risked” growth stocks, each of them up 8% last week. Yet the Nasdaq 100 ‘s premium to the overall S & P 500 remains at 25% — higher than at any point in the decade before the Covid pandemic hit. And the history of prior tech busts, such as after the 2000 market peak, suggest this group can have a long period in the wilderness even after they stop going down, lagging the broader tape for years. Foreign stocks over U.S.? And the broader tape, as measured by the equal-weighted S & P 500, continues to act better than the top-heavy headline index. This egalitarian basket, buyable via the Invesco S & P 500 Equal Weight ETF (RSP) , is up 16% from the autumn low, is down less than 12% from its record high and has broken to a new cycle high against the traditional S & P 500. The big growth stocks’ poor positioning and performance is also a factor in an emerging preference for overseas markets. American tech-stock dominance was a big part of US indexes’ vast outperformance over the rest of the world for the past 15 or so years. There are now hints of a potential reversal. Non-U.S. markets as a group — see the iShares ACWI ex-US ETF (ACWX) — was up more than 4% last week against 1.5% for the S & P 500. The dollar is near a seven-month low. China is reopening and Europe’s markets are skewed toward value sectors and exporters. Bank of America global strategist Michael Hartnett issued a call to “Buy the world” versus the U.S. for those and other reasons. Citi’s global strategists Friday downgraded US equities to underweight, saying European stocks, in particular, are priced more for a potential profit slide than are American shares. Such calls for an international comeback have been made many times in the past decade to little avail, though it could well be that the moment now is more ripe. That U.S. profit forecasts are too high is a widely shared view, and a reasonable one, though it’s hardly a sure thing that the market is oblivious to this. Low expectations Morgan Stanley shows this chart plotting the forward consensus S & P 500 earnings tally against the index’s forward P/E as proof that profits will fall a good deal. Perhaps so, though one can also read this as the market generally anticipating turns in the earnings trend, and likely a good part of the past year’s compression in valuation reflects a risk that profits have more room to fall. It’s also worth noting that the current Wall Street projection of 4% S & P 500 earnings growth is, somewhat surprisingly, the lowest year-ahead forecast in at least 35 years, according to Deutsche Bank. And this includes a number of years when earnings ended up negative – and in some of those years, stocks did not decline (1998, 2012, 2015, 2020). Put this into the file of evidence that, whatever this market’s problems, upbeat expectations are not among them. Bears have exceeded bulls for 40 straight weeks in the AAII retail-investor poll for the first time ever, active managers in the NAAIM positioning survey showed an historically low 39% equity exposure last week and the final weeks of 2022 saw heavy flows out of equity funds. None of which means the market has absorbed all that a tricky macro environment has to throw at it. Stocks celebrated evidence of declining wage growth and services-sector prices on Friday , after three weeks of tightly coiled sideways trading right at the down-20% level of 3800 for the S & P 500. It remains a downtrend, until proven otherwise and the Federal Reserve could certainly once again push investors back on their heels for prematurely celebrating a potential end to tightening moves. Yet strong consumer incomes and low debt-service obligations among households and companies are buffers, keeping the soft-ish landing scenario alive for now. Can housing and manufacturing retrench for a bit to decompress the economy, while overall activity muddles through? No one knows, but neither can anyone foreclose on the chance. Henry McVey, head of global macro at KKR & Co., wrote on Friday, “We are in a bottoming process where supply, sentiment and valuation (especially on the credit side) appear somewhat attractive, but unrealistic margin assumptions and a strong U.S. dollar mean that this process will take a lot longer than normal to play out.” The attractiveness of credit is being heeded, with heavy flows into bond funds absorbing a massive rush of new corporate issuance last week, a healthy sign that the capital-markets’ circulatory system is functioning well. Higher yields, with investment-grade indexes offering 5%, are popularly said to present tough competition for stocks. Superficially, yes. But the presence of safe yield – or, in fixed-income parlance, “carry” – in a portfolio can also serve to cushion against equity volatility and in fact allow investors to better shoulder the risk that stocks bring with them. The recession predictions, based on a long history of data relationships involving the yield curve and Leading Economic Indicators, can’t be disproved either, leaving the tape caught between a tough-talking Fed and a vigil for the economy to give way. If nothing else, though, the starting point for 2023 is better for an investor than it was a year ago. Back then, one was buying the S & P 500 at 21-times expected earnings, could grab no more than 1.8% in yield from 10-year Treasuries and the Fed had all of its tightening ahead of it. Now, the S & P is under 17 and at the 20-year average, with the 10-year delivering double the yield and the Fed just about done lifting rates. It doesn’t mean things are cheap and forward-returns compelling, but it pays to recall that when asset prices and valuations fall, risk is coming out of the markets and potential future returns are being restored.
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This is the daily notebook of Mike Santoli, CNBC’s senior markets commentator, with ideas about trends, stocks and market statistics. The market is well on its way toward assuming disinflation is the new trend, and it’s now busy figuring out how this will interact with Federal Reserve policy and the ultimate economic growth picture for next year. The solid and broad downside surprise on t he November consumer price index triggered the anticipated upside pop in stocks. Though after the late-day Monday levitation, with the Fed decision Wednesday and the nearby presence of the S & P 500 resistance line just overhead, the rally has backed off. As noted in recent days, the market was coiling up pretty tightly, preserving most of the October-November rally and failing to break down, in anticipation of this week’s catalysts. Inflation declining from high levels has historically been a very positive dynamic for equity performance, and investors remain in a bit of a defensive stance, so the case for year-end strength is solidifying. The broader trend remains lower until further notice, but it has a shot to challenge it here. Of course, there is the Fed decision to get through. The bond market nudged lower its best guess for the terminal fed funds rate to under 4.9% after CPI. This could place the market in an apparent conflict with the consensus Fed outlook to be unveiled Wednesday, which might show the destination above 5%. (Such committee forecasts are apparently submitted before the meeting and thus before the CPI report). Perhaps this means Fed Chair Jerome Powell will push against the market’s looser view. But the data is cooperating more now than any time this year, so a more balanced message seems likely. Many are saying he doesn’t want to see financial conditions loosen much from here, but financial conditions are just a tool, not the job. Receding core inflation excluding rent is pretty dramatic and should enable the Fed to slow and perhaps soon pause. If they’re willing to. The furious rally in bonds has been a big relief to diversified investors and is rebuilding the traditional cushion that fixed income has played in portfolios. Remember all the alarm at the end of the third quarter about the “worst year-to-date loss for the 60/40 portfolio in decades?” Much less bad now, the ETF proxy for global 60/40, the iShares Core Growth Allocation ETF , broke its downtrend and the year-to-date total return is now a less awful decline of about 13%. I’ve been making the point that a very snug consensus has been forming around 2023 holding more risk than reward at least in the first half. The crowd is arguably over-extrapolating near-term recession and earnings-decline hazards in calling for a run toward or below the October S & P 500 lows before a round trip higher. It’s plausible but not at all assured. Ebbing inflation is now bolstering real wage income. Gasoline prices are down. Mortgage rates are well off the highs. This makes it a harder call to say growth will buckle imminently. One lesson of 2022 is that in the market, there is no single equilibrium where a given index level corresponds with a particular bond yield or gross domestic product number. Nominal GDP growth is still running in high single digits, plenty of revenue to gather there. Morgan Stanley chief U.S. equity strategist Mike Wilson called 2023 profit assumptions suspect because 85% of the S & P 500 is expected to have earnings at least 10% above 2019 levels. Well, U.S. nominal GDP is 15% above 2019 peak levels. All of which is to say, the range of outcomes for macro is wide. None of this makes the market look cheap, or even particularly encouraging from a leadership perspective . Nasdaq 100 growth giants outperforming on Tuesday’s lift is fine as a reflex, but it’s probably not the formula for a better 2023 setup. Homebuilders are ripping but broader consumer cyclicals, banks and industrials are quieter. They are not sending a bold signal about a reinvigorated economy. Market breadth has softened since the open, now 2:1 up:down volume. VIX is giving up most of Monday’s outsized pop in anticipation of the CPI crap shoot. After FOMC decision, it should deflate but wouldn’t bet against a whippy reaction to the final Fed meeting of a year which saw the most aggressive tightening action in 40 years.
A trader works on the floor of the New York Stock Exchange (NYSE) in New York City, August 29, 2022.
Brendan McDermid | Reuters
After a tumultuous year for financial markets, Standard Chartered outlined a number of potential surprises for 2023 that it says are being “underpriced” by the market.
Eric Robertson, the bank’s head of research and chief strategist, said outsized market moves are likely to continue next year, even if risks decline and sentiment improves. He warned investors to prepare for “another year of shaken nerves and rattled brains.”
The biggest surprise of all, according to Robertson, would be a return to “more benign economic and financial-market conditions,” with consensus pointing to a global recession and further turbulence across asset classes next year.
As such, he named eight potential market surprises that have a “non-zero probability” of occurring in 2023, which fall “materially outside of the market consensus” or the bank’s own baseline views, but are “underpriced by the markets.”
Collapsing oil prices
Oil prices surged over the first half of 2022 as a result of persistent supply blockages and Russia’s invasion of Ukraine, and have remained volatile throughout the remainder of the year. They declined 35% between June 14 and Nov. 28, with output cuts from OPEC+ and hopes for an economic resurgence in China preventing the slide from accelerating further.
However, Robertson suggested that a deeper-than-expected global recession, including a delayed Chinese recovery on the back of an unexpected surge in Covid-19 cases, could lead to a “significant collapse in oil demand” across even previously resilient economies in 2023.
Should a resolution of the Russia-Ukraine conflict occur, this would remove the “war-related risk premia” — the additional rate of return investors can expect for taking more risk — from oil, causing prices to lose around 50% of their value in the first half of 2023, according to Robertson’s list of “potential surprises.”
“With oil prices falling quickly, Russia is unable to fund its military activities beyond Q1-2023 and agrees to a ceasefire. Although peace negotiations are protracted, the end of the war causes the risk premium that had supported energy prices to disappear completely,” Robertson speculated.
“Risk related to military conflict had helped to keep front contract prices elevated relative to deferred contracts, but the decline in risk premia and the end of the war see the oil curve invert in Q1-2023.”
In this potential scenario, the collapse in oil prices would take international benchmark Brent crude from its current level of around $79 per barrel to just $40 per barrel, its lowest point since the peak of the pandemic.
The Fed has subsequently hiked its short-term borrowing rate from a target range of 0.25%-0.5% at the start of the year to 3.75%-4% in November, with a further increase expected at its December meeting. The market is pricing an eventual peak of around 5%.
Robertson said a potential risk for next year is that the Federal Open Market Committee now underestimates the economic damage inflicted by 2023’s massive interest rate hikes.
Should the U.S. economy fall into a deep recession in the first half of the year, the central bank may be forced to cut rates by up to 200 basis points, according to Robertson’s list of “potential surprises.”
“The narrative in 2023 quickly shifts as the cracks in the foundation spread from the most highly leveraged sectors of the economy to even the most stable,” he added.
“The message from the FOMC also shifts rapidly from the need to keep monetary conditions restrictive for an extended period to the need to provide liquidity to avoid a major hard landing.”
Tech stocks fall even further
Growth-oriented technology stocks took a hammering over the course of 2022 as the steep rise in interest rates increased the cost of capital.
But Standard Chartered says the sector could have even furtherto fall in 2023.
The Nasdaq 100 closed Monday down more than 29% since the start of the year, though a 15% rally between Oct. 13 and Dec. 1 on the back of softening inflation prints helped cushion the annual losses.
On his list of potential surprises for 2023, Robertson said the index could slide another 50% to 6,000.
“The technology sector broadly continues to suffer in 2023, weighed down by plunging demand for hardware, software and semiconductors,” he speculated.
“Further, rising financing costs and shrinking liquidity lead to a collapse in funding for private companies, prompting further significant valuation cuts across the sector, as well as a wave of job losses.”
Next-generation tech companies could then see a surge in bankruptcies in 2023, shrinking the market cap share of these companies on the S&P 500 from 29.5% at its peak to 20% by the end of the year, according to Robertson.
“The dominance of the tech sector in the S&P 500 drags the broader equity index lower too,” he suggested, adding: “The tech sector leads a global equity collapse.”
