Markets Have Become Increasingly Efficient When It Comes To Pricing In Expectations

January 13, 2021 07:50 AM
Equity Index futures

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Tuesday's Close

E-mini S&P 500 Futures (March): Settled at 3794.50, up 2.50

E-mini Nasdaq-100 Futures (March): Settled at 12,890.25, down 6.75

Markets have become more and more efficient in broadly pricing in expectations. Ultimately, that’s why we witnessed record highs in the Nasdaq, then S&P, Dow, and Russell 2000 in the heart of a pandemic. At this point in time, have markets priced in where they believe stocks and economic conditions should be in the second half of the year? Maybe so. 

Ultimately, yields bottomed ahead of QE1, QE2, and QE3, not in the aftermath of such. It’s the old adage, “buy the rumor, sell the news;” the rumor isn’t so much a rumor, but your hard-earned research and thesis. Once the news is front page, it’s already priced in. Last week, risk-assets surged on the hopes of added fiscal stimulus after Georgia Democrats took both Senate seats. That rally found tailwinds from tremendously strong ISM data but was quickly exhausted as those expectations hit a roadblock; Nonfarm Payroll disappointed and, amid new, razor-thin Congressional control, one Democratic Senator said he isn’t willing to frivolously throw added stimulus to individuals. 

Something else took hold: new impeachment proceedings on President Trump. As markets price in tomorrow, next month, and the second half of the year, the impeachment has added uncertainties and, furthermore, has given the market time to digest not only the hurdles to more stimulus, but the resulting unfavorable tax consequences from the victory itself. Where some find a second impeachment of the sitting President a heroic act, the market finds it a waste of time, as he’s already due to be gone next week. 

Simply put, this is how we can explain the market’s exhaustion. Does it mean risk assets are ready to roll over and correct 5-10%? It's our belief that a correction of that size from these elevated levels is almost always a concern, but 3 out of every 4 people trying to predict that correction have been doing just that since the S&P was at 2300. There are certainly opportunities out there, but one must define their risk and their trade plan, a discussion we’ve had here before and something to discuss at another time.

Today’s economic calendar brings U.S. CPI data. The Core read is expected to print +1.6% YoY and +0.1% MoM. Results in this ballpark certainly don’t signal inflation that’s running rampant, but we believe that it’s coming. As we noted here yesterday, such inflation is one of 4 pillars to our bearish thesis on Treasury prices (bullish yields), along with new fiscal measures, bullish legs in risk-assets, and that aforementioned old adage on QE. 

For now, we’ve already called victory on our 1.25% target in the 10-year Treasury yield with yesterday’s high of 1.18%, as this was our target since 0.70%. However, as we noted, the pain would come in the wake of a move from 1.25% to 1.50%. By pain, we mean that 5-10% correction in equities becomes much, much more likely and easier to time.

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