Options, Taper, Virus: Nervous Stock Traders Picked Their Poison
(Bloomberg) -- The stock market’s perfect record of tumbling in the middle of the month remains intact. So does the record of pundits in disagreeing over what’s causing it.
With the S&P 500 Index dropping as much as 0.7% Thursday, putting it on course for its worst three-day drop in a month, investors had a plethora of explanations to review, ranging from concern over Federal Reserve tapering to a resurgent virus to worries about the supply chain and volatility born of the expiration of equity options.
“A perfect little summer storm: tapering hints, delta fears, China tech headlines, regulatory merger scrutiny,” said Oliver Scharping, a portfolio manager at German asset manager Bantleon.
On Wednesday, the Fed’s July meeting minutes showed officials agreed they could start slowing the pace of bond purchases later this year. At the same time, the persistent spread of coronavirus and slowing China growth raise questions about whether the global economy can absorb the shock of reduced support. Meanwhile, a wonky market event -- options expirations, happening this Friday -- was also cited as a possible instigator of volatility.
Because it’s been placid all summer, shocks feel worse. Wednesday’s selloff marked the first decline greater than 1% since mid-July for the S&P 500, which feels like a big move -- even though it isn’t, said Nicholas Colas, co-founder of DataTrek Research.
On average, the index has seen an up or down 1% daily move every week for the last six decades. So far in the third quarter, there have only been three. This year, the largest S&P 500 drawdown from a record has been 4.2% -- that’s the third-smallest decline from highs posted in any year since 1928, trailing just 2017 and 1964. “But as with all summer storms, also this one shall pass,” said Scharping.
Here’s what other market-watchers were saying:
Richard Bernstein Advisors LLC deputy chief investment officer Dan Suzuki:
“First, one can’t ignore the setup. We’re coming off the fastest doubling of the market in history, with the 49 new market highs this year being the most at this point in the year going back over a quarter of a century. Meanwhile, the market is still trading at valuations we haven’t seen outside of the Tech Bubble and Wall Street sentiment is more bullish than it was at the peak of the bubble,” he said. “Meanwhile, the positive earnings story has taken a back seat to the barrage of negative news in the past few weeks, including Afghanistan, the delta wave, inflation pressures, reignited supply chain worries, China’s crackdown, the Fed’s tapering of asset purchases and some negative economic surprises. So there’s been a lot more incrementally bad news than good news over the past week.”
Peter Boockvar, chief investment officer at Bleakley Advisory Group:
“Outside of the August 2015 selloff related to the Chinese yuan modest devaluation and the Covid-induced crash, every notable correction in stocks surrounded a change Fed policy toward tightening,” he said. “Lunch is not free with extreme monetary easing that eventually needs to be reversed.”
Charlie McElligott, a cross-asset strategist at Nomura Securities:
“This is not a taper tantrum. Yesterday’s minutes were a non-event, where the market has already priced 4Q official announcement anyhow,” he said in a note. “Some on the buy-side began cutting their risk ahead of the expiration events this week,” and that may have set off a chain of reactions from options dealers to computer-driven funds in a “self-fulfilling” process where selling begets selling.
Andy Brenner, head of international fixed income at National Alliance:
“Risk off is the name of the game,” he said. “Plunging global sentiment from the Delta variant, fears of efficacy from vaccines, Goldman Sachs cutting their 3rd quarter GDP by 35%, from 8.5 to 5.5, realization that Fed tapering is coming and more Chinese anti-capitalistic regulations.” He added: “We originally said that the middle of August was a good time for a correction to start, but we pulled back on that as the Fed looked to kick the tapering call down the road.” he added. “Now it looks like it will be a reality.”
Hinesh Patel, portfolio manager at Quilter Investors:
“The minutes from the Federal Reserve’s latest meeting serve as a wake-up reminder for just how much markets are conditioned to be running on central bank support. Markets have become addicted to the sheer volume of money that has been available and this is clearly going to be a drawn-out process to reduce the liquidity it has become so accustomed to,” he said. “The Fed’s positioning may just be the straw that broke the market’s back given the fears around China’s growth potential, the persistence of the delta variant and the possibility of global growth peaking. Clearly with these large risks still very much on the table, there has to be a focus on quality and owning what you want for the long haul above anything else.”
Sharif Farha, a Dubai-based portfolio manager at Safehouse Capital:
“What we are seeing today is a healthy pullback triggered by the Fed’s recent discussion on the potential to taper this year,” he said. “The reality is that U.S. markets are close to all-time highs and we haven’t had a decent sized retracement in a while.”
Charles-Henry Monchau, the chief commercial and chief investment officer at FlowBank SA:
“Yesterday’s hawkish FOMC minutes were the perfect excuse for investors to take some profits. It was interesting to see that the selloff was indiscriminate across sectors with growth, value and even defensive pulling back,” he said. “Premature tapering could kill the great recovery and thus force central bankers to turn even more dovish later on.”
Madison Faller, global markets strategist, JPMorgan Private Bank:
“We see such growth worries as only delaying, rather than derailing, the ongoing bull market. As vaccine penetration increases and interest rates eventually rise off their lows, we think cyclical sectors are on the precipice of another leg higher,” she said via email. “We think such cyclical exposures should be balanced with growth areas of the market that tend to outperform as the economy transitions into a mid-cycle environment.”
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