3 assets that have the most to fear from the Fed: Morning Brief – Yahoo Finance

This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Tuesday, February 1, 2022

Bid farewell to the endless risk-on rally

In financial markets, a week is practically a lifetime.

Last week, markets were convulsing at the thought of the Federal Reserve’s hawkish pivot from crisis-era stimulus toward inflation-fighting tightening, with stocks bleeding at the thought of higher rates.

Fast forward to Monday, and Wall Street’s risk appetite has tentatively returned. While still struggling to digest the implications of the coming rate hike cycle, investors are (at least for the moment) in a buying mood once more. Bludgeoned technology stocks led the session’s rally, with the Nasdaq’s 3.1% surge narrowly avoiding its worst ever January, and posting its best day of a year that’s only a month old.

Yes, stocks have managed to perk up, but the damage wrought by January’s sell-off is likely to linger. And in fact, it’s conceivable that things could get worse from here.

“It’s difficult to call the very next move in the market but I definitely think there’s risk to the downside, and there’s a huge advantage that active management has right now to cherry pick and stock pick and differentiate between the names,” Lauren Hill, Westwood Group’s consumer/retail analyst, told Yahoo Finance Live on Monday.

With the Fed donning its armor to slay the beast known as inflation, the only questions left are how much rates will rise, and how quickly.

Over the last couple of days, Yahoo Finance’s Brian Sozzi and Alexandra Semenova have covered the breakneck speed at which Wall Street is revising up their forecast for Fed hikes — with Bank of America economist Ethan Harris telling Sozzi that the bank expects as many as seven this year.

Whether the Fed plays small ball or gets aggressive is very much an open question. Regardless, our coming era of monetary tightening leaves investors struggling to catch multiple falling knives, and we haven’t even scratched the surface of how consumers will react to higher borrowing costs.

With that in mind, these three asset classes seem most at risk:

1. Stocks

Over at CFRA Research, Sam Stovall reminds us that January is a useful barometer for the year’s temperature. And the volatility that’s buffeted stocks since 2022 began has left lasting damage that’s going to be hard to shake off.

“Three indicators popularized by The Stock Trader’s Almanac — The Santa Claus Rally, the first five days of January, and the January barometer — offer clues as to how the U.S. equity market will perform in the current calendar year,” Stovall wrote on Monday.

“This year, the Santa Claus Rally materialized, only to fizzle out during the first five days of the new year and carry this weakness through the entire month. Since 1945, in the eight times that this combination occurred, the S&P 500 was lower for the full year by 9.6%, enduring declines in all years but one (2014),” he added.

“The equity markets may reward investors with a short-term relief rally. Unfortunately, this advance won’t likely be the end of the decline altogether,” the analyst added. Caveat emptor, as they used to say.

2. Cryptocurrencies

Over the weekend, Yahoo Finance’s David Hollerith — who’s been all over the grim shakeout in digital currencies — revealed that a new crypto protocol called Tornado Cash has played a central role in at least one high-profile ethereum (ETH-USD) hack. It’s a stark reminder that during bouts of market volatility, stories of fraud, theft and illicit behavior become more frequent, and crypto is no exception to that rule.

“The [crypto] pullback highlights that bitcoin (BTC-USD) and other cryptocurrencies are becoming more correlated with conventional financial market variables,” wrote Zach Pandl at Goldman Sachs last week (Hollerith has also been hammering this theme in his reporting).

“Over time, further development of blockchain technology may provide a secular tailwind to valuations for certain digital assets. But these assets will not be immune to macroeconomic forces, including central bank monetary tightening,” Pandl added.

3. Housing

Where people live and how much they pay to do so is an increasingly important theme in an inflationary environment that’s about to be upended by higher borrowing costs.

In its latest edition, The Economist correctly points out that “the effect of higher rates on the real economy is slower-burning and harder to anticipate,” with home owners saddled with big mortgages taken on during an era of “ultra-cheap money” that’s now about to shift into reverse.

The housing market has been sending mixed signals, but Yahoo Finance’s Ronda Lee reported last week that 30-year mortgage rates are still close to their highest levels in nearly two years, and are up over half a percentage point in a month. Meanwhile, Yahoo Finance personal finance editor Janna Herron reported on Monday that the hot housing market is boosting rental prices all across the country, a topic we’ve been plumbing in the Morning Brief as a growing part of the inflation story.

“You’ve got a lot of folks that are maybe being pushed out of the housing market as housing prices have increased,” RentPath CEO Jon Ziglar told Yahoo Finance Live recently. So what becomes of that effect when rates start to rise?

Buyer beware, indeed.

By Javier E. David, editor at Yahoo Finance. Follow him at @Teflongeek

Editor’s note: We want your feedback. Please take this quick survey to let us know if we should launch another newsletter. If the answer is yes, what type of content should the newsletter include?

What to watch today

Economy

9:45 a.m. ET: Markit US Manufacturing PMI, January final (55.0 expected, 55.0 prior)
10:00 a.m. ET: Construction Spending, month over month, December (0.6% expected, 0.4% during prior month)
10:00 a.m. ET: ISM New Orders, January (58 expected, 60.4 prior month, 61.0 revised)
10:00 a.m. ET: ISM Manufacturing, January (57.5 expected, 58.7 prior month, 58.8 revised)
10:00 a.m. ET: ISM Employment, January (53 expected, 54.2 prior month, 53.9 revised)
10:00 a.m. ET: ISM Prices Paid, January (67.0 expected, 68.2 prior month)
10:00 a.m. ET: JOLTS Job Openings, December (10.3 million expected, 10.56 prior month)
WARDS Total Vehicle Sales, January (12.9 million expected, 12.44 million prior month)

Earnings

Pre-market

6:00 a.m. ET: UPS (UPS) is expected to report adjusted earnings of $3.10 per share on revenue of $27.08 billion
Sirius XM (SIRI) is expected to report adjusted earnings of $0.07 per share on revenue of $2.25 billion

Post-market

4:00 p.m. General Motors (GM) is expected to report adjusted earnings of $1.20 per share on revenue of $34.46 billion
Alphabet (GOOG) is expected to report adjusted earnings of $30.02 per share on revenue of $59.37 billion
Starbucks (SBUX) is expected to report adjusted earnings of $0.80 per share on revenue of $7.96 billion
AMD (AMD) is expected to report adjusted earnings of $0.75 per share on revenue of $4.50 billion
PayPal Holdings (PYPL) is expected to report adjusted earnings of $1.12 per share on revenue of $6.89 billion
Match Group (MTCH) is expected to report adjusted earnings of $0.60 per share on revenue of $818.61 million
Electronic Arts (EA) is expected to report adjusted earnings of $3.23 per share on revenue of $2.67 billion
Gilead (GILD) is expected to report adjusted earnings of $1.57 per share on revenue of $6.62 billion

Politics

Shalanda Young will face two nomination hearings on Capitol Hill today to become President Biden‘s budget head. Young has been serving as the acting director since early last year when the administration withdrew Neera Tanden’s nomination for the top job.
Biden is meeting at 1:45 p.m. ET with Sens. Dick Durbin (D-IL) and Chuck Grassley (R-IA) to discuss the Supreme Court vacancy. Biden has promised to announce a nominee by the end of the month.