BackHas the Nasdaq finally caught up with reality?
The beginning of earnings season is confirmation that investors really do need to be worried about rising cost pressures.
PremiumIn the past week, we’ve seen remarkable top-down shifts in the Nasdaq going into the close, day after day. Is the market finally catching up to reality? Lisa Abramowicz and John Authers sat down to discuss the evolving situation in detail on this week’s Risks & Rewards. Here’s a lightly edited version of their conversation.
Lisa Abramowicz: This week was tumultuous. Looking at the Nasdaq in particular —the selloff, the correction — it's worth asking: Is this the week that stock markets finally woke up to the reality that bond markets were pricing in that the Federal Reserve was going to raise rates three to four times this year and start quantitative tightening?
John Authers: I think it probably is. It reminds me of Jeremy Grantham, who is in the news this week because he's redoubled on his crash call. He came up with a fantastic analogy back in 2007 when the credit market had cracked and the bond market was churning, but there was still minimal disturbance to the stock market. He said the stock market was like a brontosaurus in that if you bit a brontosaurus's tail, the nervous system is so primitive that it would take a long time for the information to reach the brontosaurus's brain and for it to start to hurt. In the same way, the stock market is like a brontosaurus.
Equities tend to be the last to react to signs of financial trouble. What we are seeing at the moment is very elevated volatility. We've moved beyond what we've seen for the last few months, which has been a removal of the obvious successes for Cathie Wood's ARK Innovation ETF and the stocks in the meme stock category and so on. It's now beginning to become more of a reassessment of what valuation the whole stock market should be trading at.
LA: I find it fascinating when people talk about the removal of accommodation. But then you take a look at the Fed's balance sheet and the latest read, which came out yesterday at 4:30 PM ET showed that the Fed's balance sheet rose to a new high, it is still expanding to $8.9 trillion! So we are a bit premature. And yet next week we do have that Fed meeting and a lot of people are expecting them to end the expansion of their balance sheet — oh, horrors! They're not going to be buying bonds anymore at a time of the fastest inflation in decades! But they also are probably going to lay the groundwork for a March rate hike. I just wonder: What changed the dynamic so significantly this week? There is a duality here. You've got on one hand, this idea that the Fed will be forced to act because of how hot inflation is, and the fact that we're seeing more wage inflation from the earnings and from every other piece of anecdotal evidence. On the flip side, you're also seeing signs of a slowdown.
So the Fed is going to be hiking at a time of decelerating economic growth, and yet people still think it's appropriate for them to be trying to curtail this inflation. It is an incredibly uncomfortable place to be. And if they don't act, they might be required to act much more aggressively later. Put all of these things together, it's a soup. I'm not getting a clear message in terms of what they ought to do, and frankly, how markets should position given that weakness is what we see sometimes in some of these earnings. Take Netflix, for example. That's a lot more fundamental weakness than a lot of people expected.
JA: Beyond that, it's very interesting that Procter & Gamble had positively surprising earnings. But it did demonstrate that when companies can pass on prices to consumers, they do, which isn't great news for inflation. It's quite interesting that the mood music coming out from the beginning of earnings season — obviously important for the stock market — is confirming this notion that we really do need to be worried about cost pressure. Generally, CEOs aren't sounding as bullish as perhaps people were expecting them to. That's always going to be something of a catalyst in the stock market. One critical point when it comes to what the Fed is going to do is the fact that we do actually have inflation to start off.
A number of sell-side analysts are making the point that for the last three or four decades, the stock market has carried on doing fine after the Fed started raising rates. And it's done fine when the 10-year Treasury yield started to rise. But we haven't had any inflation for the last three or four decades! The picture is very different and that is why it's hard to make as much sense of what's going on. We lack recent precedents for what happens when inflation is as uncomfortably high as it is now. And that makes the whole macro picture that much harder to discern.
LA: Can we sit for a minute on this idea of the Fed hiking rates into a slower economic growth trajectory? You've been terrific at highlighting how much inflation is picking up. What do you think the response ought to be from the Federal Reserve to inflation that continues to rise? Even if it moderates somewhat, if it goes down to 5%, it's still well above their target. Growth is slowing and you aren't seeing the same kind of wage gains, certainly in the lower end than you saw initially in the aftermath of the worst weeks of the pandemic. How do you navigate that?
JA: Well, that is the nightmare scenario for the central bank. There's an old joke about asking for directions in Ireland. They say, 'If I were you, I wouldn’t start from here.' That's what really creates the greatest problem for the Fed. My hunch is that push comes to shove, they are central bankers — they care about inflation! When you do have inflation embedding itself, settling in north of 5% — and it's still too early to say that that's happening — that in and of itself is a problem for growth.
We get back into the analogy of Paul Volker, I'm afraid. He hiked when the economy was not particularly good. And in the long run, everybody now thinks this was a great, heroic thing that he did. But at the time it forced the last and worst episode of the great recession of the seventies and eighties. I suspect if it does come to that, the Fed would carry on hiking and make sure that it dealt with inflation. But I'm not wild about that prospect.
LA: No, I don't think that anybody should be and yet it's something that more people are starting to contemplate. What do you think about the selloff in tech? Is there more discussion about buying the dip or is there more discussion about the beginning of something bigger?
JA: There's more discussion about the beginning of something bigger. But again, this is unscientific. It reminds me an awful lot of the summer of 2007, when the credit crisis began — when Jeremy Grantham used his brontosaurus analogy for the first time — you started getting what we've had the last few days in the Nasdaq, which was remarkable top-down shifts in the markets going into the close, day after day. That was basically when the whole concept of risk-on, risk-off started to be talked about. But the tech stocks have just been regarded as 'whatever the problem, these really big FAANG stocks are immune to it.' You know — things are good, buy FAANGs, things are bad, buy FAANGs. That psychology has plainly changed. The way people are buying and selling is very disconcerting. I'm not saying that the stakes are as high as they were during the credit crisis, but the way people are trying to assimilate is very similar. And that bothers me. Do you get any sense that people are more nervous now in the last few weeks?
LA: The biggest narrative has been a splintered FAANG, right? Tom Keene likes to say that he hates the moniker because it's such a disperse kind of field in terms of the industries that each of these companies are actually in. So you have Netflix coming out with a very low projection for first quarter subscriptions and then the shares tank 20%, which is crazy given how big the company is and how big of a role it plays in the index. But then next week we get Apple, we get Microsoft, some of the behemoths that have these fortress balance sheets and cash flows that are tremendous. The question is if we'll start to see a deceleration from some of those behemoths in terms of demand. We saw that in retail sales, we've seen it in the margins of certain places, but it might be idiosyncratic.
Netflix has its own story with content and all sorts of things and pulled forward demand during the pandemic. So a lot of people are saying, well, you know, you want to wait for a little bit more to go, and then you want to start nibbling. It doesn't feel frantic. It doesn't feel like the floor is falling out from under us. However, what you just pointed out is telling. The Nasdaq was deeply negative earlier today, then it turned kind of positive, has been hovering around there. But that's what we saw yesterday. And the day before! This is what you're talking about. It accelerated in terms of losses. So is this a matter of people trading, trying to buy the dip and then cashing out immediately and lacking conviction? Does this indicate trading rather than investing? How much does that really speak to the ongoing volatility?
John Authers is a senior editor for markets. Before Bloomberg, he spent 29 years with the Financial Times, where he was head of the Lex Column and chief markets commentator. He is the author of “The Fearful Rise of Markets" and other books.
Lisa Abramowicz is a co-host of 'Bloomberg Surveillance' on Bloomberg TV.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.
