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Monday, February 6, 2023

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‘Worst Year Ever’ For Stocks & Bonds – Global Inflation Fight Bursts ‘Everything Bubble’

Before we get to the big picture on the month, quarter, and year, this week has ended with no ‘Santa Claus’ rally this year for US stocks…

Until the last few minutes, the S&P 500 pinning around 3835 just as we said as JPM’s Collar trumped 0-DTE chaos, then everything melted up into the close…

As SpotGamma remarked earlier, as January is a put-heavy OPEX, any downside start to January could energize those puts, and serve to press markets lower.

This could lead to higher IV, and a reflexive selling loop to the downside. We’d then look for a rally after OPEX, as those puts expire.

Conversely, should January start off with strength, those puts could help to fuel a rally as their values collapse leading to an early, material stock rally.

OPEX could then trigger a reversal of that market strength. We currently assign edge to this scenario.

Trade the first week of January should help shed light on the timing of the rally (i.e. pre-OPEX or post-OPEX) as the machines show the way…

The dollar slipped lower, gold higher, and bitcoin lower on the week as Treasury yields surged into year-end…

Source: Bloomberg

On the year, global stocks suffered a 20% decline in 2022, the 2nd worst year since 1974, as central banks fought inflation in the face of supply chain shortages and an energy crisis due to the COVID-19 pandemic and Russia’s invasion of Ukraine…

Source: Bloomberg

Worse still, as The FT reports, a traditional portfolio consisting of 60% US stocks and 40% US bonds will have seen its worst performance since 1932, when the U.S. was in the midst of the Great Depression.

As US bond returns are suffering their worst stretch in over a century…

US equity and bond markets lost a combined $17.4 trillion in 2022 at their October lows…

Source: Bloomberg

And while The Dow ‘only’ fell 9% in 2022, Nasdaq plunged over 33%

Source: Bloomberg

Over $7 trillion in stock market cap has been erased from the Nasdaq 100. While the Nasdaq 100”s drop was bigger in 2008 (down 41.9%), it was only down about $1 trillion in 2008 though, because the denominators have gotten so much bigger…

Source: Bloomberg

European stocks were also slammed lower (worst year since 2018) with UK worst and Spain the prettiest horse in the glue factory…

Source: Bloomberg

With the ‘longest duration’ stocks having been hammered the hardest

Source: Bloomberg

Energy stocks turned in a dramatic performance and were the only US equity sector with gains in 2022 (as Consumer Discretionary and Tech underperforming)…

Source: Bloomberg

“This has been a year to be in the bunker,” says John Bilton, head of global multi-asset strategy at JPMorgan Asset Management.

Gold ended the year unchanged as the dollar surged; and while bonds and stocks were monkeyhammered lower, crypto was really clubbed like a baby seal…

Source: Bloomberg

The volume of negative-yielding debt has collapsed in 2022 (from a peak over $18 trillion in Dec 2020, there remains a modest $113 billion left, mainly in short-dated JGBs)…

Source: Bloomberg

As The Fed unleashed its most aggressive tightening cycle in decades

Source: LPL

Some investors welcome this new discipline.

“This has been a train crash waiting to come,” says Alexandra Morris, chief investment officer at Norway’s Skagen Funds.

“Now, money has a cost. You can’t just throw money at unprofitable businesses, very risky businesses. We need to have a much more sensible allocation of capital.”

As the year ends, 113 counterparties parked a record $2.554 trillion at the Fed’s overnight reverse repurchase agreement facility, in which counterparties like money-market funds can place cash with the central bank. That was $245 billion more than the day before, the biggest one-day increase ever.

Source: Bloomberg

Demand for the facility has tended to surge at the end of each quarter as dealers curtail their activity in the market for repurchase agreements in order to shore up their balance sheets for regulatory purposes.

US Treasury yields exploded higher this year, led by the short-end, as the market realized The Fed wasn’t kidding about its anti-inflation stance. 2Y Yields rose a stunning 370bps in 2022 while 30Y yields rose over 200bps…

Source: Bloomberg

Which meant a massive flattening in the yield curve…

Source: Bloomberg

…driving the entire curve deep into inversion…

Source: Bloomberg

For some context, 2Y Yields started the year at 0.72% and ended at 4.43% (with Fed Funds now trading above it)…

Source: Bloomberg

The last six months have seen dramatic swings in the market’s expectations for The Fed’s monetary policy trajectory with the terminal rate surging up to around 5.00% as the expectations for a H2 2023 rate-cutting cycle (which implies a recession) surging dovishly in Q4…

Source: Bloomberg

The dollar has gained more than 8 percent over the year, but it lost more than 8 percent this quarter on expectations the Fed may not raise rates as high as previously feared…

Source: Bloomberg

Cryptos took annus horribilis to ’11’ this year with the big ones – BTC and ETH – down 64% and 67% respectively as chaos reigned across the ecosystem…

Source: Bloomberg

On the commodity side of the board, it was a very volatile year with copper down notably (growth/demand scares) and energy up (supply scares), though the latter is dramatically below its mid-year panic highs…

Source: Bloomberg

WTI had a volatile year as Putin invasion reactions battled China COVID restrictions

Source: Bloomberg

Despite the dollar’s gains, gold ended unchanged on the year, rallying back above $1800 after triple-testing $1600 support…

Source: Bloomberg

Silver outperformed gold on the year, with Q4 seeing the gold/silver ratio top out (at 2019/2020 resistance) and fall back into the red for the year…

Source: Bloomberg

Finally, if you’re hoping for a rebound in 2023, there’s really only one factor you can pray for…

Source: Bloomberg

When (or if) The Fed ends its QT program? Or this?

See you in 2023!

This post was originally published on this site

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