With the election out of the way, investor concerns turned toward drama in the crypto market and concern about tomorrow’s October Consumer Price Index (CPI) data. This drove a high level of “risk-off” type of trading, with investors flocking toward the dollar amid rising volatility.
Crypto Weakness Drove Risk-Off Sentiment Today, Hurting More Aggressive Areas of Market
Risk-related Sectors Like Semiconductors, Biotech Take Blows as Investors Flock to “Defensive” Sectors
Worries About “Crypto Contagion” Spreading to Rest of Market are Likely Overblown
Alex Coffey, Market Strategist, TD Ameritrade
(Wednesday Market Close) A pre-election, risk-embracing rally quickly retreated Wednesday as concern heightened over increased instability in crypto.
Even with results still uncertain in Washington, the digital asset story took center stage as media reports spread of a collapsing mega-merger between the largest crypto exchanges. Though most investments aren’t tied to this particularly volatile alternative asset, crypto has a way of cooling most risk-taking appetites when it takes a tumble.
After an already-tumultuous week for the cryptocurrency industry, Binance announced after the close it was pulling out of a deal struck just yesterday to buy struggling competitor FTX. Binance attributed the decision to due diligence issues and reports “regarding mishandled customer funds and alleged U.S. agency investigations.” The news took both digital currencies and publicly traded companies lower during the session.
Near the close, bitcoin slid close to $16,000, a two-year low, while the Solana token lost another 40% after finishing down more than 26% on Tuesday.
It’s important to keep this in perspective, however. While the crypto pullback that began yesterday and continued today may have summoned fears of “contagion-risk”—meaning an impact on broader markets—any contagion would likely spread only to the riskier parts of the market.
That’s why companies perceived as especially risky, including those related to crypto and even some of the unprofitable “meta” stocks that rallied last year take it on the chin when risk-off sentiment grows.
Welcome to what’s called a “flight to safety,” though no investment is truly “safe.” When investors seek less exposure to volatile and aggressive parts of the market, they often gravitate toward bonds and the dollar. Within the stock market, utilities, real estate, consumer staples, and health care—known as defensive sectors—often lead the way.
That’s what happened in the last few hours.
It’s only one day, of course, not a trend, and like a turtle, maybe investors wanted to climb back under their shells as voting totals kept coming in and they anxiously await tomorrow’s October Consumer Price Index (CPI) data (see more below). Still, it could be interesting to see if this trend continues.
Volatility shifted into slightly higher gear today and remains above recent lows. The Cboe Volatility Index® (VIX) climbed above 26 Wednesday, up from recent lows below 25, but didn’t make any kind of meteoric move. Any climb back toward 30 would probably cause more concern.
Disney (DIS) earnings and outlook pushed shares of that market behemoth lower, weighing on the Dow Jones Industrial Average ($DJI), as DIS is a component.
One positive element Wednesday was a better-than-5% rally in Meta (META) shares after the company announced more than 11,000 layoffs. That may be little consolation to long-term investors in the stock, which has lost about three quarters of its market capitalization since mid-2021.
Some of today’s risk-off action could be powered by October CPI due tomorrow shortly before the opening bell. Federal Reserve Chairman Jerome Powell himself said last week that CPI is something the Fed plans to watch closely as it prepares for its December meeting.
Analysts forecast Headline CPI growth of 0.7% compared with 0.4% in September and Core CPI growth of 0.5% compared with 0.6% in September.
The expected large jump in headline CPI likely reflects higher food and energy prices, both of which get stripped out of the core CPI number. A slowdown in Core CPI might get a positive market bump even if it’s accompanied by a higher headline number, simply because food and energy prices are so volatile month to month.
Keep an eye on housing costs too, which makes up an outsized percentage of the CPI. Back in September, housing prices rose 0.7%, pretty close to the average monthly gain since last spring. The housing market has been under a lot of pressure the last month or two from rising mortgage rates, though supply remains thin. Any kind of slower climb in housing prices would likely be welcomed by the market.
The election certainly played a big role in Wednesday’s rout, though the most likely outcome still appears to be market-friendly gridlock in Washington. Still, some investors may have been disappointed when predictions of a “red wave” mid-term election didn’t seem to materialize. This isn’t a political column, but we’d be remiss not to note that such sentiment played some of a role in the recent rally.
Wall Street tends to like it when things don’t get done in Washington, and is particularly sensitive now to any emerging fiscal policies that might blunt the Federal Reserve’s attempts to slow the economy. Division in D.C. would have a chance of slowing any major changes in Congress’s spending over the next two years. If you want gridlock, a split Congress is probably the best scenario for the markets.
A little more clarity on the balance of power in Washington, if we get it, could ease uncertainty. But there’s no real sense of when things might be more certain on the political front, especially with the Senate hanging in balance and Georgia likely heading toward a run-off Senate election.
Here’s how the major indexes performed Wednesday:
CHART OF THE DAY: RISK-AVERSE. Two parts of the market widely associated with “risk-on” sentiment got clipped Wednesday as investors took their foot off the gas. Both the Philadelphia Semiconductor Index (SOX—candlestick) and the Nasdaq Biotech Index (NBI—purple line) saw their rallies pause. Data Sources: Philadephia Stock Exhange, Nasdaq. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Nov. 10: October Consumer Price Index (CPI) and expected earnings from Ralph Lauren (RL), AstraZeneca (AZN), and Dillard’s (DDS)
Nov. 11: Preliminary November University of Michigan Consumer Sentiment
Nov. 14: Expected earnings from Tyson Foods (TSN)
Nov. 15: October Producer Price Index (PPI), November Empire State Manufacturing, and expected earnings from Home Depot (HD) and Walmart (WMT)
Nov. 16: October Retail Sales and Industrial Production, and expected earnings from Lowe’s (LOW) and Target (TGT)
Nov. 17: October Housing Starts and Building Permits, November Philadelphia Fed Index, and expected earnings from Ali Baba (BABA), Kohl’s (KSS), and Macy’s (M)
Nov. 18: October Existing Home Sales and expected earnings from Foot Locker (FL) and JD.com (JD)
Nov. 21: Expected earnings from Dell (DELL) and Zoom Video (ZM)
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