Stocks Move in Lockstep as Fed’s Rate Increases Show No Mercy
The S&P 500’s one-month realized correlation has climbed to highest level since March 2020
Shares of everything from technology giants to household-goods companies and utility providers have been trading in lockstep over the past month, a potentially worrying sign to investors trying to navigate a turbulent market.
The S&P 500’s one-month realized correlation—a measure of how stocks in the benchmark index have moved in relation to one another over the past 30 days—climbed to 65.3% on Sept. 13, according to Susquehanna International Group.
It has since hovered around 60%, levels last seen in March 2020 when stocks across sectors fell in unison at the onset of the Covid-19 pandemic. A correlation of 100% means stocks are all moving together, while a correlation of zero means their moves aren’t related at all.
The Federal Reserve’s bid to raise interest rates to tame red-hot inflation has shown no mercy in the stock market. The S&P 500 is down 25% in 2022 and off 17% from its summer peak on Aug. 16. All 11 sectors of the index are down over the past month. For the year, only the energy group is in the green.
Stocks have been trading together because investors are largely focused on macroeconomic news—and conflicting economic data have led them to flip-flop their bets on whether the Fed will maintain its pace of rate increases.
“Markets are being chased all together, which is rare,” said Chris Murphy, co-head of derivatives strategy at Susquehanna.
Businesses and consumers continue to grapple with rising costs, the U.S. dollar has soared to a 20-year high and oil prices surged above $100 a barrel after Russia invaded Ukraine. Those factors have sparked declines in everything from stocks to bonds and gold this year.
Next up, investors are looking ahead to Thursday’s consumer-price report for any signs the cost pressures are easing, data that will influence the Fed’s path forward on rates.
At the start of last week, some investors shifted their bets that the Fed was nearing a pivot after the release of cooler manufacturing and job-openings data. Markets notched their best two-day stretch since 2020. About 90% of the stocks trading on the New York Stock Exchange recorded two consecutive days of gains for the first time since early 2013, according to analysts at Bank of America Corp.
“When you basically shift up your interest rates, that’s just going to impact everything,” said Brando Reyn a, portfolio manager for Novare Capital, an investment adviser based in Charlotte, N.C., that manages $1.3 billion in assets.
The rally was short-lived. The S&P 500 has fallen in each of the following five sessions. Plus, Friday’s jobs report showed the labor market remains robust and the unemployment rate has fallen back to a half-century low, shattering hopes that the Fed would pause raising interest rates.
The prospect of higher rates has led to few outright winners in the market. A Bespoke Investment Group analysis of the Russell 3000 found that a basket of stocks with low valuations, high-dividend yields and large market caps fell about 15% on average from their summer highs in mid-August to the end of September. In comparison, the average stock in the index dropped almost 19% through the same period.
“You’re not trying to hit home runs in this environment. Singles are good,” said Kevin Flanagan, head of fixed-income strategy at WisdomTree, of the difficulty of trying to beat the broader market. Mr. Flanagan said he is seeking safety in Treasury floating-rate notes this year.
One factor that has pushed correlations higher: the popularity of exchange-traded funds. Investors in index-tracking funds who want to increase or decrease their exposure to stocks during periods of turmoil can buy or sell only broadly—not pick and choose shares.
The tandem moves extend well beyond stocks. Government bonds, which are considered a haven during times of financial turmoil, have slipped alongside stocks for three consecutive quarters for the first time since 1974, according to Strategas Research.
The Bloomberg U.S. Aggregate bond index—which tracks a basket of government and investment-grade corporate bonds—is down about 15% this year. Gold, another haven, has fallen 8.1%.
“There’s no way out. We just have to sit through the pain,” said Seema Shah, chief global strategist at Principal Global Investors, of the simultaneous declines in stocks and bonds.
Some investors say they will be watching to see whether the kickoff of the third-quarter earnings season later this week will help break the stretch of lockstep moves. They will be trying to identify which companies have been able to navigate the challenging environment and successfully pass on higher costs to their customers.
Already, the S&P 500’s one-month implied correlation, a measure of how the market expects stocks to move in relation to one another over the next 30 days, has started to drop, according to Susquehanna.
Brian Mulberry, client portfolio manager at Zacks Investment Management, said he is advising investors to be picky when deciding which stocks to buy, suggesting they seek high-quality companies that are boosting earnings and paying dividends.
“You’ll have these good companies priced lower than where they should be, and that creates an opportunity for investors,” Mr. Mulberry said.
Research Calls
- Upgrades:
- American Intl (AIG) upgraded to Buy from Hold at Jefferies; tgt raised to $64
- CME Group (CME) upgraded to Buy from Hold at Deutsche Bank; tgt lowered to $200
- DocuSign (DOCU) upgraded to Neutral from Underperform at Wedbush; tgt $55
- Dutch Bros (BROS) upgraded to Overweight from Neutral at JP Morgan; tgt $38
- Fortive (FTV) upgraded to Overweight from Equal-Weight at Morgan Stanley; tgt raised to $73
- Lyft (LYFT) upgraded to Buy from Hold at Gordon Haskett; tgt $24
- NOV Inc. (NOV) upgraded to Buy from Neutral at Citigroup; tgt $25
- Downgrades:
- Cinemark (CNK) downgraded to Underperform from Outperform at Credit Suisse; tgt lowered to $9
- Cooper (COO) downgraded to Hold from Buy at Jefferies; tgt lowered to $295
- Fidelity Nat'l Info (FIS) downgraded to Neutral from Overweight at Atlantic Equities; tgt lowered to $90
- Fiserv (FISV) downgraded to Neutral from Overweight at Atlantic Equities; tgt lowered to $105
- Pioneer Natural Resources (PXD) downgraded to Neutral from Buy at Citigroup; tgt lowered to $240
- Playtika (PLTK) downgraded to Neutral from Buy at BTIG Research
- Skillz (SKLZ) downgraded to Sell from Neutral at BTIG Research; tgt $0.65
- Stanley Black & Decker (SWK) downgraded to Equal-Weight from Overweight at Morgan Stanley; tgt lowered to $82
- Others:
- argenx (ARGX) initiated with a Perform at Oppenheimer
- BlackSky Technology (BKSY) initiated with an Outperform at Credit Suisse
- Boeing (BA) initiated with an Underperform at Credit Suisse; tgt $98
- BWX Technologies (BWXT) initiated with an Outperform at Credit Suisse; tgt $65
- Cboe Global Markets (CBOE) initiated with a Neutral at Citigroup; tgt $130
- Charles Schwab (SCHW) initiated with a Neutral at Credit Suisse; tgt $83
- CME Group (CME) initiated with a Buy at Citigroup; tgt $220
- CONMED (CNMD) initiated with a Hold at Jefferies; tgt $85
- General Dynamics (GD) initiated with a Neutral at Credit Suisse; tgt $238
- HEICO (HEI) initiated with an Outperform at Credit Suisse; tgt $185
- Huntington Ingalls (HII) initiated with a Neutral at Credit Suisse; tgt $245
- Interactive Brokers (IBKR) initiated with a Buy at Citigroup; tgt $85
- Intercontinental Exchange (ICE) initiated with a Neutral at Citigroup; tgt $102
- InMode (INMD) initiated with a Buy at Jefferies; tgt $40
- Insulet (PODD)initiated with a Hold at Jefferies; tgt $260
- Integra (IART) initiated with a Hold at Jefferies
- L3Harris (LHX) initiated with an Outperform at Credit Suisse; tgt $267
- Lockheed Martin (LMT) initiated with an Underperform at Credit Suisse; tgt $375
- LPL Financial (LPLA) initiated with a Buy at Citigroup; tgt $290
- MarketAxess (MKTX) initiated with a Buy at Citigroup; tgt $285
- Mynaric AG (MYNA) initiated with an Outperform at Credit Suisse; tgt $10
- NASDAQ (NDAQ) initiated with a Neutral at Citigroup; tgt $62
- Northrop Grumman (NOC) initiated with an Outperform at Credit Suisse; tgt $560
- Raymond James (RJF) initiated with a Neutral at Citigroup; tgt $117
- Raytheon Technologies (RTX) initiated with a Neutral at Credit Suisse; tgt $85
- ResMed (RMD) initiated with a Hold at Jefferies
- Rocket Lab USA (RKLB) initiated with an Underperform at Credit Suisse; tgt $3
- Spire Global (SPIR) initiated with a Neutral at Credit Suisse; tgt $2
- Stifel Financial (SF) initiated with a Neutral at Citigroup; tgt $60
- Tradeweb Markets (TW) initiated with a Buy at Citigroup; tgt $67
- Transdigm Group (TDG) initiated with an Outperform at Credit Suisse; tgt $661
- Virgin Orbit Holdings (VORB) initiated with an Underperform at Credit Suisse; tgt $1
- Virtu Financial (VIRT) initiated with a Buy at Citigroup; tgt $26
Gapping down
In reaction to earnings/guidance:
- OMI -8.6% (lowers guidance; names new CFO), PHG -8.2%
Other news:
- CCJ -12.4% (CCJ and BEP form partnership to acquire Westinghouse Electric; also announces $650M bought deal offering; also provides Q3 operating update)
- TCN -2.7% (sells interest in multi-family portfolio)
- CTO -2.4% (files $500 mln mixed securities shelf offering)
- BBAI -1.6% (CEO steps down; names former IBM exec as new CEO)
- EGRX -1.3% (files $200 mln mixed securities shelf offering; also submitted an investigational new drug application to the FDA for CAL02 for the treatment of severe community-acquired bacterial pneumonia)
- RCUS -1.2% (files for 11613029 offering by selling shareholder)
- ADEA -1.1% (Canadian court decision)
- APAM -1% (reports September AUM)
Analyst comments:
- COO -2.5% (downgraded to Hold from Buy at Jefferies)
- PLTK -1.1% (downgraded to Neutral from Buy at BTIG Research)
- BA -0.8% (initiated with an Underperform at Credit Suisse)
Gapping up
In reaction to earnings/guidance:
- PEP +2.8%, ETWO +0.7%
Other news:
- CANG +23.5% (approves special dividend of $0.50 per ordinary share or $1 per ADS)
- LOCO +12.7% (declares $1.50/sh special div; also authorizes new $20 mln share repurchase program)
- KNBE +11.4% (KnowBe4 is close to a deal to be acquired by Vista Equity Partners according to WSJ)
- AUTL +9.1% (announces that Moderna has exercised its option to license Autolus' proprietary binders against an undisclosed immuno-oncology target for the development and commercialization of mRNA therapeutics)
- GATO +8.5% (increases production guidance and lowers cost guidance for 2022)
- RCKT +4.5% (Announces Presentations Highlighting Lentiviral Gene Therapies at the 29th Annual Congress of the European Society of Gene & Cell Therapy)
- SGMO +4.2% (Updated Preliminary Phase 1/2 Data in Fabry Disease Showing Continued Tolerability and Sustained Elevated a-Gal A Enzyme Activity in Nine Patients)
- AB +4.1% (reports September AUM)
- ESTE +4% (purchases 3 mln shares from Warburg Pincus)
- GRIN +3.5% (Announces Agreement With Taylor Maritime Investments Limited)
- ANGI +3.4% (reports Sept performance metrics)
- RCMT +3.4% (acquires TalentHerder)
- AMRN +3.3% (issues statement in response to Sarissa)
- MRNA +3% (Moderna & Merck (MRK) announce exercise of option by Merck for joint development and commercialization of investigational personalized cancer vaccine) ATAI +3% (positive initial results for phase 1 trial of KUR-101 an oral formulation of mitragynine for OUD)
- UVE +2.3% (provides update on Hurricane Ian impact)
- BGNE +2.3% (announces positive topline results from final progression-free survival analysis of BRUKINSA (zanubrutinib) Compared to IMBRUVICA (ibrutinib) in Phase 3 Chronic Lymphocytic Leukemia Trial)
- GRNA +2% (announces realignment to focus on near-term value drivers)
- MSM +1.7% (increases dividend)
- IAC +1.3% (reports Sept performance metrics)
- AWK +1.2% (to purchase Butler Area Sewer Authority for $231.5 mln)
- BEP +1.1% (CCJ and BEP form partnership to acquire Westinghouse Electric)
- TRIP +1.1% (CFO to retire names new CFO)
- GE +1% (files Form 10 with SEC for planned spin-off of GE HealthCare)
- UEC +1% (to acquire Roughrider from Rio Tinto (RIO) for $150 mln)
Analyst comments:
- NOV +3.2% (upgraded to Buy from Neutral at Citigroup)
- AIG +1.6% (upgraded to Buy from Hold at Jefferies)
Early premarket gappers
- Gapping up:
- CANG +18.6%, LOCO +14.7%, GATO +13.2%, ESTE +4.4%, AB +4.1%, RCMT +3.4%, RCKT +3.2%, BBAI +3.1%, BEP +3%, GRIN +2.7%, UEC +2.3%, AHT +2.1%, ANGI +1.9%, UVE +1.9%, PEP +1.8%, DICE +1.7%, AMRN +1.7%, MSM +1.7%, IAC +1.3%, TRIP +1%, GM +0.7%, BHR +0.7%, AZN +0.6%, TSCO +0.6%, GE +0.5%
- Gapping down:
- ADEA -9.9%, CCJ -9.8%, PHG -7.5%, TCN -2.7%, EGRX -1.3%, RCUS -1.2%, APAM -1%, CLOV -0.6%, CTO -0.5%
The EU Is Divided Over Its Natural Gas Price Policy
By Irina Slav
- Internal divisions are deepening within the EU as countries attempt to lower the price of natural gas while also ensuring they secure enough of it.
- Germany’s decision to announce a 200-billion-euro aid package to ease its domestic crisis while opposing a price cap has angered some members.
- EU leaders are meeting again towards the end of the month, and they will aim to find a gas price policy that can please all its members and, most importantly, the sellers.
The European Union’s leaders have been hard at work trying to find ways to ensure both the security and affordability of energy in the bloc over the past few months. Initially focusing on the security part, affordability has now claimed the spotlight.
As heating season begins, EU member states are turning on each other in their increasingly desperate attempts to secure enough gas to last until spring and to ensure that it is affordable. Some believe this could indeed lead to radical measures that would lower prices. Others are not so sure.
The EU’s energy ministers have been meeting regularly over the past few weeks to discuss possible measures for ensuring the supply of gas for all member states in a situation where the largest supplier of the bloc, Russia, is gone for, many believe, good.
Norway has stepped up, so has the United States, and even the UAE has agreed to send five cargoes of LNG to Germany next year. But that’s next year. Now, Europe needs more gas, and it needs it on the cheap. Its options are not exactly unlimited.
A group of 15 member states suggested last month that the EU caps the price of all gas imports to manage its expenses. They did not comment on what LNG sellers might have to say about that idea, insisting that this was the only way to ensure gas is affordable for Europeans in what is shaping up to be the harshest winter for Europe in generations, regardless of the weather.
Then a smaller group came up with a more precise idea for the caps. The idea is to set up a so-called gas price corridor, or a range, that is lower than market prices but moves with them. According to the authors—Belgium, Greece, Italy, and Poland—this corridor could also apply to long-term contracts. Again, it seems that nobody consulted the sellers.
The Commission has spoken against price caps for non-Russian gas imports. Instead of a blanket cap, President Ursula von der Leyen proposed capping the price of natural gas used to generate electricity. Discussions continue, but hostility within the EU is growing, making the need to decide on working measures all the more urgent.
Germany, for instance, has managed to turn a lot of European states against it after it announced a 200-billion-euro aid package for businesses and households to cope with soaring energy prices. Naturally, less wealthy EU members weren’t happy with that. They were even less happy that Germany opposed a gas price cap.
“If Germany acts only on the national level what they might be doing is really compromising the economic stability of Europe and also jeopardizing the political unity,” Simone Tagliapietra, research fellow at Belgian NGO Bruegel, told the Wall Street Journal.
The WSJ noted in a report on the gas discussions in Europe that the internal tensions in the bloc could in fact help it become more decisive about crisis measures and ultimately agree to a gas price cap.
This, the authors of the report argued, would not be the best news for LNG exporters, but they could agree to sell their LNG at a lower price to avoid a deep recession in Europe that would destroy longer-term gas demand.
On the other hand, a report in Euronews quoted energy experts as warning that a price cap on gas imports would “end the market as we know it.” One of these experts, Elisabetta Cornago, a senior energy researcher at the Centre for European Reform, told Euronews that the EU was looking at gas prices without reference to other factors, and that reference needed to be made, because “Prices are high because of scarcity.”
Indeed, capping gas prices will not be enough. There is simply not enough LNG and pipeline gas outside Russia for Europe to breeze through winter as usual. And there are not enough regasification terminals in Europe to ensure an even supply of gas across the bloc.
Under pressure, the EU is turning on the ones that do supply it with gas. Euractiv reported this month that complaints about Norway’s revenues from its higher gas exports to the bloc are growing louder. In Germany, Economy Minister Habeck and an MP separately accused the U.S. of charging too much for its LNG. Tensions are running high.
EU leaders are meeting again towards the end of the month. By then, hopes are that they will have tailored a decision on gas prices that would provide some relief to struggling economies facing a recession.
Yet hopes are elusive. Hoping is one thing, but getting everyone to work together to make those hopes a reality is another thing altogether. With increasingly deep divisions within the bloc that has been calling for unity and solidarity in a time of adversity, it is difficult to see a workable decision being made anytime soon that would satisfy all members. And we have yet to hear from the gas sellers.
By Irina Slav for Oilprice.com