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Despite the hawkish Fed, US equity futures continue to be supported by earnings. However, the quantitative tightening process added to the pressure and uncertainty that has plagued the markets lately.
Dow Jones Industrial Average
Despite a hawkish Fed, Dow Jones Industrial Average futures saw a strong bounce. The market was led by industrial names such as Boeing, Chevron and Cisco. It also lifted by big banks and energy stocks.
The Dow Jones Industrial Average futures gained 278 points at the end of the session. The index is a price-weighted index of 30 large, publicly owned blue chip companies. It is calculated by multiplying the number of shares outstanding by the stock price.
Stocks rallied after the release of better-than-expected earnings. Companies including Domino’s Pizza, Delta Air Lines and Victoria’s Secret announced solid earnings outlooks. The market also rebounded after news that the FTC was filing an antitrust lawsuit against Activision Blizzard.
S&P 500
Despite the hawkish words of US Federal Reserve Chairman Jerome Powell, S&P 500 futures broke out of a six-day losing streak. The market’s biggest mover was an upbeat report on consumer prices. The CPI report quelled fears of inflation. But inflation is likely to slow down as the Fed hikes rates.
The S&P 500 jumped 3.6%, as better-than-feared numbers from the mega-cap technology sector lifted the index. Alphabet (GOOG) reported a better-than-expected quarter, while Cisco Systems (CSCO.O) reported a better-than-expected year-over-year increase in revenue. However, Zoom Video (Zoom.com) fell 4.6% following fourth-quarter earnings.
The biggest gain was in the energy sector, as energy stocks outperformed the S&P 500 by nearly 18%. The green line tracks the percentage of S&P 500 stocks that exceed a 50-day moving average.
Nasdaq 100
Despite the recent Hawkish Fed, Nasdaq 100 futures are being supported by strong earnings and an outperformance against the S&P 500. The S&P 500 is down 20% YTD. The index is on track for the longest quarterly decline streak in 20 years.
Nasdaq-100 constituents have a lot of pricing power and cash cushions. Their operating leverage is stronger than the SPX, and their median gross margins are higher. They also have lower sensitivity to wage inflation. This makes them better positioned to withstand higher interest rates than the SPX.
The Nasdaq-100 has also avoided deep fundamental damage during multiple financial crises. This is particularly important in an inflationary environment. In addition, Nasdaq-100 companies have higher labor productivity and profit per employee than the SPX.
Bullish opinion among financial newsletter editors
Despite the Federal Reserve’s hawkish stance, some financial newsletter editors still see US equity futures as supported by earnings. This sentiment was reflected in the latest Hulbert Nasdaq Newsletter Sentiment Index, which measures the average recommended equity exposure level among short-term market timers. It climbed to 41.7% from 38.6% in early October.
The S&P 500 closed higher on Monday, gaining 1.5%. But the market isn’t fully priced in a 50-basis-point hike in interest rates, and economists expect just a 0.5 percentage point increase in December. The Fed is likely to raise borrowing costs this week, but it’s unclear if the Fed will continue to hike rates in 2019.
Despite the recent relief rallies, many market analysts are still unsure of the outlook for the economy. One key question is whether the economy has moved beyond the current “slowdown” stage, as central banks are expected to step up their efforts to slow economic growth.
Quantitative tightening adds to tightening pressure and uncertainty
Despite the Federal Reserve’s atypically low rate hike last week, the 10-year Treasury yield hit a high of 1.30% on expectations that stronger economic growth will support a stronger labor market. As well, the Fed said it would allow $50 billion per month of runoff from its massive balance sheet.
Quantitative tightening, also known as balance sheet normalization, is the process of reducing the size of the Fed’s balance sheet by selling some of its government bonds. Unlike quantitative easing, which is an extension of the central bank’s large asset purchase program, this approach has the potential to destabilize financial markets.
The Fed’s monetary policy has a significant impact on global markets. Some expect the Federal Reserve to taper its bond purchases, a move that would be negative for fixed income markets, while other parts of the market expect the Fed to stay on hold.
Investor positioning as mitigating factor on the downside
Despite the Federal Reserve’s continued tightening of financial conditions, the market has continued to underperform. In fact, all three benchmarks finished more than 1.7 percent down from their respective highs. The Dow ended the quarter at its lowest level since June. The S&P 500 lost more than two percent, and the Nasdaq Composite dropped mor