Choppiness Warning: Fed Meeting, Stimulus Wrangling And Tesla's Index Debut

Given the many challenges endured this year, it seems only fitting that it should wind to a close amid uncertainty and caution. That seems to be where we are this week. As several recurring themes—stimulus, Fed policy, virus cases and the impending rollout of a vaccine—come to a head. Plus, it’s quadruple witching week, and stock indices are about to get a makeover.

One potential bright spot? We’re hearing the word “bi-partisan” for the first time in quite a while. It’s been so long, in fact, that some investors might have needed a dictionary to find out what the word meant.

Here’s where we are as Tuesday’s trading day gets underway. Early signs are pointing green, so perhaps the S&P 500 Index can break its four-day losing streak.

First, the stimulus front. Time is of the essence in terms of getting something done ahead of the holidays, with some Hill watchers saying today is the day that something needs to get done. There are a few bills being floated around Washington, including a potential “two-part” relief bill—the first of which includes areas with bipartisan consensus such as vaccine distribution, small business aid, unemployment extension, transportation, education, and housing assistance—and leaves the main sticking points—liability protections and aid to state/local governments—until a later date.

And speaking of stimulus, today is day one of a two-day Fed meeting. While no major monetary policy moves are expected, Fed watchers will be listening closely to see what the central bank might be thinking as we head into 2021 (see more on the Fed below).

And then there’s the continued back-and-forth between the vaccine rollout and the rising case counts. While vials filled with vaccine doses have started making their way out to doctors and hospitals, such optimism is at times overshadowed by rising case counts in the U.S. and across Europe. Some larger cities here and abroad are eyeing a new wave of full lockdown. That last point seems to punctuate the need for stimulus, particularly for small businesses. As (0:Goldman Sachs) CEO David Solomon pointed out on CNBC this morning, we’re a tale of two economies (a “bar-bell economy” in a way). Many large businesses are doing well, but small businesses—in many ways the backbone of the economy—are struggling. New lockdowns will certainly leave a mark.

Speaking of large companies, shares of Apple (NASDAQ:AAPL) rose in the pre-market on a Reuters report that the world’s largest consumer products company plans to ramp up production of its flagship iPhone by 30% year-on-year, according to a forecast AAPL had shared with its suppliers. Given AAPL’s influence in the consumer market, the company’s plans are viewed by many as a proxy for the state of consumer demand.

Volatility: The Macro and the Micro

But if there’s one theme that may be defining the end of 2020, it’s volatility. Markets have ebbed and flowed a bit to start the week. Even volatility itself has been a bit volatile, with the Cboe Volatility Index (VIX) advancing earlier in the week to above 24 but falling about 6% in the early going Tuesday.

When prices make big moves over long periods, it’s called volatility. When it’s lots of back-and-forth in the short term, it’s called “choppiness.” We’ve seen a good share of both.

Take yesterday, for example. It was one of those “fireworks days.” Not the ooh-and-aah type, though, but rather the bang-and-fizzle type. Futures on the major stock indices started the week with a nice advance, but by afternoon, the S&P 500 and Dow Jones Industrial Average flipped to the red side.

The reality of the COVID-19 vaccine distribution is a bright spot as the year comes to an end. It’s a big moment after a pretty grim year, but it may be awhile before we see businesses getting back to pre-COVID-19 levels. Keep in mind we’re seeing rising cases and further shutdowns in some states. And these economic uncertainties could put some sort of lid on the bullish sentiment.

It may take some time before we see a boost in industries that were hit hard by the virus. Case in point: travel-related companies. Maybe when people get vaccinated and are comfortable traveling again, we could see a boom in airlines, cruise lines, and other travel related stocks. With many countries still not fully open, people are probably not in any rush to book airline tickets or make hotel reservations.

For its part, however, the NASDAQ Composite carried the day Monday, advancing nearly 0.5%, as the spotlight turned to a few big names such as PayPal (NASDAQ:PYPL)—which was named by investment banking advisor Evercore as its “top pick of 2021.” Amazon (NASDAQ:AMZN) and soon-to-be-SPX member Tesla (NASDAQ:TSLA) also flashed bright green on Monday’s heat map.

Semiconductor shares helped COMP as well, with strong showings from NVIDIA (NASDAQ:NVDA), Intel (NASDAQ:INTC), and Advanced Micro Devices (NASDAQ:AMD) after a Bank of America) analyst survey suggested the release of new gaming consoles is “driving a GPU upgrade cycle.” The Philadelphia Semiconductor Index has had a wild 2020, and at this point looks to be finishing the year at or near the top (see chart below). When you consider the top trends of 2021—working, learning, and shopping at home, plus the rise of in-home entertainment—they all seem to require better, faster chips.

Fed, Witching Day And A Change In Index Lineup

It’s not just the virus that’s on investors’ minds. We have a big week ahead of us with the Federal Reserve meeting today and tomorrow, earnings season wrapping up with Nike (NYSE:NKE) reporting on Friday, and quadruple witching—the expiration date for December futures and options contracts—to end the week.

The 10-year Treasury Index has been in an uptrend channel since early August. So it’ll be interesting to hear what the Federal Reserve has to say especially about their asset purchase plans. Will they extend the maturity of their bond purchases? That would probably be important guidance to listen for. And it’ll be interesting to see if TNX continues its upward trend as a result of the Fed’s decision—though it’s worth noting that the uptrend has stalled out below 1.0% twice in the last six weeks.

Given the quarterly witching day is happening just as TSLA enters the SPX (see more below) it wouldn’t be out of reach to expect higher than average trading volume—and choppiness—as traders and investors square up positions.

We’re also getting toward the end of the year and we could see people take off some risks. Some investors may not be sure about what they want to do with their money in the new year considering there will be a new administration. Plus, some investors—and money managers as well—may want to realize their capital gains when they know what their tax rate is likely to be.

Bottom Of The (Sector) Barrel

Though the market closed Monday on a mixed note, the red-hot* Energy sector took it on the chin, falling over 3%. Why the asterisk? While it’s true Energy has been firing on all cylinders lately—it’s coming off six straight weeks of advance and has lapped the sector field over the past three months—year-to-date, the S&P 500 Energy Index is down more than 30%.

Energy has been tough to pin down this year, as there looks to be competing dynamics over the short-, intermediate-, and long-term horizons. The coronavirus lockdown and recession from earlier in the year certainly put a damper on demand, but a recent uptick in economic activity—plus a renewed commitment by OPEC+ to honor and enforce output cuts—have helped boost energy prices, and hopefully profit margins of refiners and intermediaries. But over the long term, world leaders—including the incoming Biden administration—have been pushing for new calls to action to address climate change, specifically shifts away from the use of fossil fuels.

In Monday’s Energy pullback, some big refinery names—Baker Hughes (NYSE:BKR), Halliburton (NYSE:HAL) and Marathon Oil Corporation (NYSE:MRO) led the way down, but the biggest laggard award goes to Occidental Petroleum (NYSE:OXY), which fell 8% after news that when TSLA joins the SPX and S&P 100 at the end of the week (more on that below), it’s OXY that will be booted from the OEX. TSLA—for its part—continues its climb, gaining nearly 5% yesterday to within a stone’s throw of all-time highs set earlier this month.

Buyers’ Remorse? When Airbnb (NASDAQ:ABNB) IPO’d last week, its first-day pop saw its market cap skyrocket to over $100 billion. That valuation dwarfs the six largest IPOs in recent U.S. history. Equally impressive, DoorDash's (NYSE:DASH) IPO release saw its valuations rise to $55 billion—three times greater than its last private valuation. But after reaching their highs, ABNB and DASH pulled back quite a bit in subsequent sessions. While Wall Street has been a bit exuberant over venture capital-backed debuts, some research firms can always step in to temper the excitement. That’s the big question with IPOs—what’s the right valuation for newly issued IPOs? If share prices reflect investor sentiment on future earnings forecasts, it’ll all depend on ABNB’s and DASH’s future earnings performance. And like many IPOs, positive earnings may or may not come for some time. So, in the meantime, it’s more about potential rather than proof in the pudding.

Not Quite a Space Oddity but Close: TSLA has exhibited quite the impressive take off since word of its being included in the S&P 500 as of Dec. 21. The takeoff may not be quite like the red Tesla roadster blasted into deep space atop a SpaceX Falcon Heavy rocket a few years back, but TSLA shares did blast skyward an impressive 56% over the past month. Index rebalances like this can be a major market event especially as investors become more tied to indices. But the TSLA rebalance is a pretty big one. Think about it: to buy $80 billion of TSLA shares, an equivalent amount of the remaining stocks on the SPX have to be sold. The largest rebalance on record was $50.8 billion back in 2018. When all’s said and done, TSLA will account for about 1% of the entire SPX’s market cap. Perhaps the TSLA rally may be the market’s attempt to price in the stock’s valuation. But remember, managers for funds indexed to the SPX will likely begin purchasing TSLA shares ahead of the index rebalances on December 21.

A Green Balloon On Horizon: If you follow an economic calendar, you might have come across the term money supply. It comes out each Thursday, and traders of a certain age may remember a time when it was a market-moving announcement each week. These days—not so much. Some traders might not even know what it is. Put simply, it’s the total amount of currency and other monetary assets in the country—and since the beginning of the pandemic, the M1 money supply—funds that can be used immediately for spending—has risen 65%. Why is this important? Such rapid money supply expansion has never happened in the history of the U.S.

So, what’s with the increase? The Federal Reserve’s asset purchases of government securities aim to keep the pump primed amid the COVID-19 crisis. The flip side to all of this is the inflation; and investors are keeping their eye on the money supply to gauge its long-awaited return. Although there’s much more that goes into inflationary factors besides money supply, the ballooning green is something worth watching. After all, over 20% of all the dollars in existence was created in 2020. A large “disturbance in the (monetary) force” such as this can’t go without some kind of residual effect, or can it? As this week’s muted inflation showed, it’s not being manifested just yet.

Disclaimer: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.