The Waiting Is the Hardest Part

By Jeffrey Cane |  Monday, December 13

Central Bank Week. Given the large presence the world's central banks have had in markets since the financial crisis, it's not surprising that investors might feel nervous coming into this week. Some 20 central banks are meeting the next few days, just as questions about inflation and the Omicron variant are looming ominously. 

The most important central bank meeting, of course, is the two-day meeting of Federal Reserve policy makers that gets under way tomorrow. In the face of a tenacious rise in prices, the Fed is expected to indicate on Wednesday that it will speed up the winding down of its bond-buying, which would set the stage for interest rate increases to come earlier.  As Randall Forsyth pointed out in Up & Down Wall Street this weekend in Barron's, "While widely anticipated, this shift is seen leading to widely divergent outcomes by seasoned analysts and investors."

According to the CME FedWatch Tool, the probability of at least one interest rate increase by the May 4 Federal Open Market Committee meeting is now at 54%. Three increases by the end of next year are the most popular scenario.

Amid the uncertainty about Fed outcomes, investors chose to be cautious today, and stocks fell, ending the session at their lowest levels. The S&P 500 closed down 0.9% after a record close on Friday. The Dow Jones Industrial Average also declined 0.9%. 

Tech stocks were among the losers, and the Nasdaq Composite ended off 1.4%. The NYSE Fang+ Index fell 2.7%. Tesla tumbled 5%. Apple closed down 2.1%, to $175.74, even after J.P. Morgan raised its 2022 price target on the stock to $210, a Wall Street high. Apple needs to close above $182.856 to reach $3 trillion in market capitalization. 

Energy stocks were weaker as crude oil futures slipped 0.5%, to $71.29 a barrel. Both APA (formerly Apache) and Marathon Oil fell more than 5%. The SPDR S&P Oil & Gas Exploration & Production exchange-traded fund lost 4.5% 

The risk-off sentiment was evident in the Treasury market, where prices rose. The yield on the 10-year Treasury note declined to 1.423% from 1.487% on Friday.

More defensive equity sectors also did well today: the Utilities Select Sector SPDR ETF (up 1.2%) and the Vanguard Consumer Staples Index ETF (up 1.1%). 

Bitcoin slumped, trading at $46,892 this afternoon. It is now down about 31% from highs reached just in November. 

 Gold was slightly higher, at $1786.30 an ounce.

While investors may fear the punch bowl being taken away next year, Jonathan Golub, chief U.S. equity strategist at Credit Suisse, reminds us the arrival of rate increases is not necessarily a bad precursor for stocks. He wrote today:

History shows that stock returns remain robust in the months leading up to and following the first rate increase. Over the past four cycles (’94, ’99, ’04, ’15), the S&P 500 gained 9.5% in the 12 months prior to the first hike, and 26.0% over the subsequent three years. The real damage from higher rates tends to occur later in the cycle when tighter policy flattens/inverts the curve. We are far from that point.