Stocks Drop in Roller-Coaster Week for Wall Street: Markets Wrap

(Bloomberg) -- Volatility gripped financial markets, with stock moves magnified by the quarterly expiration of options and futures.

In a session of heavy trading volume, the S&P 500 extended its weekly slide. With the holidays fast approaching, it could have been the last day of 2021 with enough liquidity for investors to trade in and out of large positions. The dollar climbed after Federal Reserve Governor Christopher Waller said rates could rise as early as March, following a decision to end asset purchases sooner than planned. The Treasury curve flattened, with the spread between five and 30-year bonds near Friday’s lows.

Read: The Fed’s Talk of Raising Rates Has Made Them Go Down Instead

In the last couple of days, central banks in the U.S. and Europe have pivoted –- at varying speeds -- toward tighter policy. They now see reining in prices as a higher priority than protecting output and employment from further pandemic fallout. Some analysts have warned that the Fed might need to end its upcoming hiking cycle sooner rather than later, with the recent plunge in long-term yields suggesting economic growth could be at risk.

Such backdrop has investors questioning whether stocks are due for a rougher patch, following the surge from pandemic lows. It has also put highly valued shares such as tech companies on the spotlight. The cohort of marquee names like Apple Inc., Tesla Inc. and Amazon.com Inc. has faced intense gyrations, surging in the immediate aftermath of Wednesday’s Fed decision, tumbling on the next day and posting mild losses Friday.

Comments:

• “Even though we’re coming from a place of very liquid markets and a lot of accommodation, the directional change and the pull forward in the taper schedule and the potential rate-hike schedule... this is a velocity change that we’re seeing and that’s really what the market is digesting,” Anna Han, equity strategist at Wells Fargo Securities, told Bloomberg Television.
• “Our advice to investors is to stay invested, but be cautious. While it’s generally a wise idea to stay invested through any downturns or periods of volatility, it’s also important for investors to know their own risk tolerance,” said Robert Schein, chief investment officer at Blanke Schein Wealth Management.
• “The cyclical value sectors such as energy, materials and industrials have historically done well leading up to the start of Fed rate hikes. We wouldn’t be surprised to see value stocks make another run as the economy picks up some speed after the latest waves of Covid-19 variants fade -- hopefully soon,” said Jeffrey Buchbinder, equity strategist at LPL Financial.

Read: New York Reports Over 20,000 Covid-19 Cases in Single-Day Record

In another sign that investors are wary about the impacts of tighter policy on frothier industries, the MSCI World Growth Index of companies with stronger earnings expansion has underperformed its value counterpart this month.

The old stock market adage of “buy the first hike, sell the penultimate rate hike” could go wrong this time with inflation running hot, according to Bank of America Corp.

“Little cracks” were appearing in megacap tech before tightening even began, Michael Hartnett, BofA’s chief investment strategist, wrote in a note. He remains bearish until investor positioning “shows full-blown capitulation” or a credit event on Wall Street causes central banks to announce a reversal of tightening.

Corporate highlights:

• Elon Musk offloaded a second batch of Tesla Inc. shares in a matter of days and is now three-quarters of the way done selling 10% of his stake in the company.
• FedEx Corp. jumped after raising its outlook and posting earnings that handily beat analysts’ estimates.
• Rivian Automotive Inc. slumped after the electric-truck maker’s debut earnings report revealed a slower-than-expected increase in production.
• Darden Restaurants Inc., the operator of Olive Garden restaurants, dropped after its forecast fell short of estimates and the company said its chief executive officer will retire next year.

For more market analysis, read our MLIV blog.

Some of the main moves in markets:

Stocks

• The S&P 500 fell 1% as of 4 p.m. New York time
• The Nasdaq 100 fell 0.4%
• The Dow Jones Industrial Average fell 1.5%
• The MSCI World index fell 0.9%

Currencies

• The Bloomberg Dollar Spot Index rose 0.6%
• The euro fell 0.8% to $1.1239
• The British pound fell 0.7% to $1.3234
• The Japanese yen was little changed at 113.74 per dollar

Bonds

• The yield on 10-year Treasuries was little changed at 1.41%
• Germany’s 10-year yield declined three basis points to -0.38%
• Britain’s 10-year yield was little changed at 0.76%

Commodities

• West Texas Intermediate crude fell 2.7% to $70.45 a barrel
• Gold futures were little changed

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