(Bloomberg) — It’s been two weeks since Jerome Powell surprised traders when he said the Federal Reserve is considering a faster end to its program of economic stimulus. For stock traders who’d spent almost two years cruising in a can’t-miss market, the ride has gotten bumpy.
Major averages are more volatile, squeezed by anxiety over future policy and the rapidly spreading omicron variant. While dip-buyers have limited the overall damage, bouts of unease have gotten deeper. The Nasdaq 100 has fallen seven times in 13 sessions — and each time it dropped, the loss was more than 1%.
Beneath the market’s surface, casualties are piling up. The new Roundhill MEME ETF (ticker MEME), which bets on day-trader favorites, has fallen every day since its launch Wednesday and has lost 13%. A fund tracking newly public companies is down 11% in December, while an index of special purpose acquisition companies, or SPACs, has lost 8%. And Bitcoin, the showpiece of meme and spec-investing culture, is down roughly 30% from its all-time highs reached just a month ago.
“Last week, we saw euphoria due to marginally positive omicron news and hit new record highs,” said Max Gokhman, chief investment officer at AlphaTrAI. “Then, as if with a holiday hangover, investors woke up Monday to a reminder that there is indeed a Fed meeting this week and it’s likely to be hawkish.” His firm’s algorithms have been moving between net-long and net-short throughout this volatile stretch and finally took a short stance on big tech ahead of Tuesday’s market open.
The volatility was on full display Tuesday, a day before the Fed’s last policy decision of the year. The Nasdaq 100 sank more than 2% at its lowest only to erase more than half of that in the final hour of trading. The selling began early, after another report showing inflation is running hot sank some of the most-expensive pockets of the stock market.
Companies that thrived in last year’s lockdown environment are some of this year’s biggest losers. Peloton Interactive Inc. has lost more than 70%, while Zoom Video Communications Inc. is off by about half in 2021. Lemonade Inc. and Zillow Group Inc. have each also declined more than 50%.
The so-called diamond-handed investors, retail traders who held tight when their favorites like AMC Entertainment Holdings Inc. started to wobble, haven’t been as successful. AMC has plunged 60% since its June high. GameStop Corp. has dropped 50% since then.
“Diamond hands got cold and put mittens on,” Gokhman said. “Nobody seems to be buying the dip on meme ‘stonks’ and so without an uplift they’re falling with the grace of an icicle caught in a gust of winter winds. When it comes to the Fed, Powell will reiterate what he said in the testimony. No more Mr. Dove Guy.”
Here’s what other investors and strategists are thinking about as Powell gets ready to step up to the lectern one last time this year:
JoAnne Feeney, partner at Advisors Capital Management:
“Powell’s chief concern will be to convince markets that the Fed has the tools to bring inflation lower and signaling a faster taper will be a key element. But he will also try to reassure investors that this move will not compromise the further recovery of production and of real economic activity, and he is likely to cite some improvement in employment and supply chain bottlenecks to support that view. The Fed needs to make sure to maintain its credibility by aggressively moving to turn the inflation trend around.”
Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors:
“Investors are now focused on how the Fed will thread the needle of applying the brakes without stalling the economy. We’re just about 2% off the record high on the S&P 500, but the broad index is masking some interesting developments beneath the surface. It’s not lost on us that staples and utilities are the best-performing sectors so far in December. The fact that staples is outperforming discretionary on an equal-weighted basis also bears watching.”
Emily Roland, co-chief investment strategist at John Hancock Investment Management:
“The Fed holds the keys to this cycle. If they move quickly to stomp out inflation, they may risk cutting the cycle short. If they decide that they can be a little bit more patient — which, I think, is looking harder and harder — they have the ability to extend this cycle. We’re setting up for some hawkish moves into next year.”
Drew Matus, chief market strategist for MetLife Investment Management:
“I want to see with regards to the Fed funds rate changes — which I think the Fed is going to signal that they’re going to go more than once in 2022 — whether they signal more than that. Have we leapfrogged over the moderates? Have we gone straight into a much more hawkish stance? If we see that leapfrogging that suggests that the Fed feels like it might be a little behind the curve. That’ll make people nervous and move them into more of a risk-off framework.”
Kevin Gordon, senior investment research specialist at Charles Schwab:
“The notion that the market’s been resilient this year hasn’t been fully true — what you just have to do is peel it back one layer and you can see that. We’re approaching a really crucial point. It’s probably not going to be as clear until we get more clarity on the inflation picture, heading into the first quarter and then into the second quarter.”
Brian Nick, chief investment strategist at Nuveen:
“The risk of the Fed tightening — which gets more severe every time we get a high inflation number, like the producer prices we got this morning — and then omicron, which is completely independent, those two things are wreaking havoc day to day with the market. But it’s been impressive to see that we were, as of Friday, back to all-time highs. We’re not that far off — so there’s still a lot of resilience, there’s still a sense of investors still aren’t sure where to go if it’s not U.S. large cap.”
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