US technology stocks were sold off sharply in the new year, and cyclical stocks were favored in the market

[just a week ago, the market believed that the next time to raise the federal funds rate would be in May after the Federal Reserve ended the code reduction. One week later, the probability of raising the interest rate by 25 basis points in March has reached 75%.]

U.S. stocks did not get off to a good start in the first week of the new year. The minutes of the Federal Reserve meeting, which was tougher than market expectations, plunged market transactions into turmoil in the second half of the week. With the 10-year U.S. bond yield hitting 1.8%, the tide of selling technology stocks plunged the NASDAQ by 4.5% in a single week, breaking the worst performance in the same period in nearly six years. Capital flows to cyclical sectors such as energy and finance, betting that economic recovery and interest rate hike will boost the attractiveness of value stocks. With the Fed’s further determination to curb inflation, speculation about raising interest rates and shrinking the table may continue to plunge the market into a vortex of volatility in the short term.

The Fed is poised to raise interest rates in March

Just a week ago, the market believed that after the Fed ended the code reduction, the next time point for raising the federal funds rate would be in May, and the probability of raising interest rates in March was slightly more than 50%. A week later, the probability of raising interest rates by 25 basis points in March has reached 75%.

This seemingly dramatic change comes from the newly released minutes of the Federal Reserve’s December 2021 meeting. The minutes mentioned that participants generally believed that in view of their forecasts of the economy, the labor market and inflation prospects, it might be reasonable to raise the federal funds rate faster than previously expected. Many members further suggested that the pace of table contraction after interest rate increase may be faster than the previous cycle from 2017 to 2019.

The first financial reporter noted that at the press conference after last month’s meeting, Federal Reserve Chairman Powell stressed that the committee had not made a decision on how long to raise interest rates after the end of bond purchase, but mentioned that it would not delay too long on the issue of reducing the table. The latest minutes were interpreted by the outside world as an important consensus reached within the Federal Reserve in the discussion on the normalization of monetary policy, which was also confirmed in the routine speeches of several Federal Reserve officials last week. James Bullard, a hawkish member and chairman of the St. Louis Federal Reserve, once again called for an interest rate increase in March, thus promoting the trend of volatile rise in the yield of each cycle since the beginning of the year.

For the Fed, the epidemic remains a major threat to the economy. The data released last week showed that although the demand for factory orders was better than expected, the growth rate of construction expenditure fell, and the expansion of ISM manufacturing and service index began to slow down. The latest employment data released is mixed. The U.S. Department of labor said that 190000 new non-agricultural jobs were added in December 2021, the lowest in nearly a year. At the same time, the unemployment rate fell to 3.9% from 4.2% in November 2021, breaking the best level since the outbreak in February 2020.

Bob Schwartz, a senior economist at the Oxford Institute of economics, said in an interview with the first financial reporter that although the unemployment rate is continuing to decline, it can also be seen that U.S. job growth is under pressure at the end of last year. At the same time, the labor force participation rate remained at 61.9%, coupled with the further acceleration of employee salary growth, which showed that the labor market still showed a structural mismatch between supply and demand. He believes that the reason for the slowdown in growth is still the labor shortage, which is partly related to the epidemic factors. The good news is that the recruitment demand of enterprises is still strong, but it will take some time to finally achieve the goal of full employment.

At the end of last year, the Federal Reserve raised its inflation expectations for this year and next in its quarterly economic outlook Sep. many officials, including Federal Reserve Chairman Powell, expressed their determination to control prices. In addition to the supply chain bottleneck still not being substantially solved, the continuous acceleration of employee salary growth is also increasing the risk. In the past six months, the annual growth rate of individual hourly income in the United States has reached 5.8%. Schwartz told reporters that this is why the Fed pays attention to the labor force participation rate. Job seekers’ return to the market can be used as a pressure relief valve for excessive salary growth. He expects that the Omicron strain will continue to inhibit the recovery of labor supply in the first quarter. If the epidemic gradually improves with the promotion of vaccination, the job market will reach the goal of full employment in the second half of the year.

Many Fed officials will make public speeches in the coming week, and inflation may continue to be the focus. It is generally expected that the year-on-year growth rate of us CPI in December will rise to 7.1%, maintaining the highest level in 40 years. Price pressures may have an impact on President Biden’s economic agenda. Democratic Senator manqin said last week that he had not negotiated with the White House or democratic dignitaries on the $2 trillion tax and social spending agenda. He is still worried about inflation, epidemic spread and geopolitical turmoil, which deserve more attention than Biden’s agenda of “rebuilding a better future (3.42, – 0.08, – 2.29%)”.

In addition to inflation, important data to be released this week also include the producer price index (PPI). Considering that the supply chain bottleneck has not been significantly alleviated, the PPI growth rate is expected to reach 9.8% in December last year. Considering the epidemic situation, including the monthly retail sales rate in December last year, industrial output and the University of Michigan consumer confidence index in January this year, there may be a slowdown.

For the prospect of raising interest rates, Schwartz is cautious about whether the Fed will “pre emptively” in March. He believes that although Omicron will not pose a real threat to the U.S. economic recovery, the Federal Reserve will still try to protect the labor market recovery process from policy changes. From the current situation, the interest rate meeting in March will become the focus, which may further clarify the path of future monetary policy normalization and confirm the time point of the first interest rate increase.

Cyclical stocks rise capital long volatility

U.S. stocks did not make a good start to the new year until the end. The NASDAQ and the S & P 500 index ended their first week of trading with four consecutive negative days. Investor sentiment fluctuated. Zhishang’s panic index VIX, which measures market volatility, rebounded rapidly from its low in recent two months. It once broke through the 20 mark in the session, rising nearly 9% that week.

From last week’s market performance, the policy tightening expectations conveyed by the minutes of the Fed’s meeting have dampened market enthusiasm. Technology stocks represented by growth have become the key target of capital selling, and the valuation system benefiting from the low interest rate environment is facing a test. Star stocks generally performed poorly. Apple (172.17, 0.17, 0.10%) fell after the market value rose by $3 trillion, down 3% in a single week, Google (2740.09, – 10.93, – 0.40%), Microsoft (314.04, 0.16, 0.05%) fell by more than 5%, Naifei (541.06, – 12.23, – 2.21%), Adobe (510.7, – 3.42, – 0.67%), salesforce (228.31, – 0.84, – 0.37%) fell by more than 10%. Information technology ranks third from the bottom in the performance of the S & P 500 index, only better than the health care and real estate sectors.

Cyclical value stocks have become the beneficiaries of plate rotation. The energy sector rose 9.0%, continuing the performance of the strongest sector last year. The upgrading of the domestic situation in Kazakhstan and the limited production capacity in Libya and other countries boosted the performance of oil prices and related stocks, including oil service giant Schlumberger, which rose 17% in recent five trading days. With the high yield of medium and long-term US bonds, financial stocks are also favored by funds, and the weekly increase of the sector reached 5.4%. Investors believe that with the economic recovery and the Fed’s interest rate hike cycle, cyclical stocks are expected to usher in better performance.

Lars Skovgaard Andersen, investment strategist at dansk bank wealth management company, pointed out that the market may go through a difficult journey next. He expects the volatility to continue at least until technology companies begin to report results later this month. Anderson sees the sell-off as a bargain hunting opportunity, but he intends to target financial stocks rather than technology growth stocks in turmoil, because banks will benefit from the rise of fed interest rates in the future.

Short term market fluctuations have slowed capital inflows. According to data provider refinitiv Lipper, as of the week of January 5, the net amount of investors buying U.S. equity funds was $8.98 billion, almost half of the $18.55 billion of the previous week. Among them, value funds attracted us $1.21 billion, with capital inflow for the third consecutive week, while growth funds showed capital outflow of more than US $700 million after net purchase for two consecutive weeks, which is consistent with the market trend.

Trading in the derivatives market continued to be active. According to the data provided by Jiaxin financial to the first financial reporter, the average daily option trading volume of US stocks reached 41.2 million in the first week of the new year, higher than the level of 38.6 million in December last year. Investors are on guard against volatility risks. Randy Frederick, managing director of Jiaxin financial transactions and derivatives, pointed out that last week, the open positions of VIX call options increased by 7.4% month on month, and the short options increased by 3.5% month on month, indicating that investors are long on volatility after the Federal Reserve released the tightening signal and believe that the short-term downward pressure has not been fully released.

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