Happy New Year! Let’s hope 2022 is very much in the past for the stock market, which had its worst year since 2008, and for the bond market, which had its worst year ever!
So far, things look on the up and up for the stock and bond markets, which doesn’t make a ton of sense when you get down to it. There is some sense to it, however, on the surface of things.
What we have this morning is some bargain-hunting activity in both markets. The pressure of tax-loss selling on the stock market has eased; meanwhile, a sense that things can’t get any worse for the bond market than they did last year has brought back some buyers.
For the bond market, however, it is more than that. Today’s activity, which has the 2-yr note yield down five basis points to 4.37% and the 10-yr note yield down 13 basis points to 3.75%, is also rooted in slowdown concerns and a fear of central banks making a policy mistake by continuing to raise interest rates.
In that regard, nothing has changed in the weekend switchover from 2022 to 2023.
The impetus for the rally in the Treasury market and other sovereign bond markets stems from a batch of manufacturing PMI readings out of Asia and Europe that were all tilted below 50.0, which is indicative of manufacturing activity in a state of contraction.
There has been some allowance for the understanding that several of the reports were better than feared, particularly out of Europe, yet the understanding in the bond markets is that economic conditions are weak and central banks are still poised to raise rates further to fight inflation, potentially inviting a policy mistake that makes economic conditions worse. The IMF Director told BBC that it is likely that 33% of the world’s economies will be in recession this year.
The disconnect, therefore, with the strength in both markets this morning is that weak economic conditions are not good for earnings prospects.
Still, stock market participants seem to be casting aside that concern for the moment.
Currently, the S&P 500 futures are up 24 points and are trading 0.6% above fair value, the Nasdaq 100 futures are up 99 points and are trading 0.9% above fair value, and the Dow Jones Industrial Average futures are up 157 points and are trading 0.5% above fair value.
We are seeing pre-market gains in Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), and Amazon.com (AMZN) that are bolstering the futures market. Tesla (TSLA) is a noticeable absentee on the rebound list. It is down 4.0% after reporting Q4 delivery data that was weaker than analysts expected.
Tesla’s struggles are largely its own at the moment. The equity futures market has other things on its mind, namely trying to get 2023 off to a good start despite a fear of economic problems that were wrung out of stocks in 2022 but which, unfortunately, rang in with the new year as well.
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Originally Posted January 3, 2022 – Out with the old year and in with the new
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