The Week that Was: January 31 to February 4

A concise weekly overview of the U.S. equities and derivatives markets

Last week (January 31 – February 4), U.S. equity markets continued to experience significant intraday volatility. The S&P 500 Index 9-day average true range (ATR) declined slightly from 105 handles to 96.2. Nevertheless, that constitutes an ATR of 2.1% at current index value, which is unusually high. Cboe’s Put/Call ratio, which includes Indices, Equities and ETFs has been grinding higher, meaning put volumes continue to outpace call volumes on average. That ratio remained below 1 between April 2019 until early 2021. Hedging activity is the most likely driver.

The pickup in realized volatility has been largely driven by the shift in monetary policy and expectations of rate hikes in the near future. Financial conditions have been tightening. The dynamic plays out in a variety of ways, including the Treasury curve flattening and value stocks outpacing growth stocks since December. Short term yields continued to move higher with velocity. Longer-dated yields also increased last week with the 10-year U.S. Treasury Index moving above 1.90% and trading at the highest levels since the mid-2019.

Fed Fund futures are now pricing in a higher probability (approximately 40%) of a 50-basis point hike at the March Federal Open Market Committee (FOMC) meeting. Longer term, the market is moving closer to pricing a total of 150 basis points higher (six quarter-point hikes) by the end of the year.

In terms of weekly sector performance, Consumer Discretionary and Energy led, gaining 4.2% each. Real Estate and Utilities lagged, posting fractional gains. Last week was one of the busiest weeks for corporate earnings reports, with more than 20% of the S&P 500 Index constituents reporting.

The jobs data was mixed. Wednesday’s ADP number showed a decline of 301,000 in January, which was the largest drop since the start of the COVID-19 pandemic. Friday’s nonfarm payroll number showed a gain of 467,000, which was well above expectations. The previous two months data were also revised higher. The labor participation rate increased with more people now looking for jobs.

Quick Bites

Indices

• U.S. Equity Indices surged higher between Monday and Wednesday, swooned on Thursday, then found footing on Friday.
• S&P 500 Index (SPX®): Increased 1.55% week-over-week, after moving in a 4.1% range during the week. 
• Nasdaq 100 Index (NDX): Increased 1.66% week-over-week. NDX 10-day historical volatility is up 40%.
• Russell 2000 Index (RUT℠): Increased 1.32%. week-over-week following four consecutive lower weekly closes.  
• Cboe Volatility Index™ (VIX™ Index): Declined 4.5 vols week-over-week. Last week, the VIX Index moved between just below 30 and just above 20, before closing at 23.22.

 Options

• SPX options average daily volume (ADV) was 1.56 million contracts per day, below the previous week’s average of 1.92 million contracts per day. The one-week at-the-money (ATM) SPX options straddle (4,500 strike with a 2/11 expiration) implies a +/- range of about 2.2%.
• VIX options ADV was about 560,000 contracts last week, which was lower than the previous week’s ADV of 960,000 contracts. The VIX options call-put ratio was 0.87:1.
• RUT options ADV was 40,000 contracts, down from the previous week’s ADV of 48,100.

Across the Pond

• The Euro STOXX 50 Index increased 1.25%.
• The MSCI EAFE Index (MXEA℠) increased 2.2% and the MSCI Emerging Markets Index (MXEF℠) increased 2.6% week-over-week.

Charting It Out

Observations on VIX futures term structure

• The VIX Index fell by nearly 4.5 points on the week as U.S. equity markets found traction.
• The VIX Index closed at 23.22. The average closing level for the VIX Index so far in 2022 is 23.08. 
• The VIX futures term structure snapped back into its more typical contango. The February/March (Month-1/Month-2) spread settled at 0.90 wide with March over February.
• By comparison, the previous Friday, that spread closed at even money. The February VIX futures contract fell by 2.65 on the week and the March VIX futures declined 1.90 for the week. 

VIX Futures Term Structure

Source: LiveVol Pro

Macro Movers

• The 30-year U.S. Treasury yield closed at 2.21%, higher by 12 basis points week-over-week. The 10-year U.S. Treasury yield ranged from 1.94% to 1.74% and closed at 1.93%, up 15 basis points week-over-week. The 2-year U.S. Treasury yield moved up another 16 basis points to 1.32%. Short term yields are now just below levels from February 2020, prior to the onset of the COVID-19 pandemic.
• The S&P GSCI gained 3.65% last week. Crude Oil continues its climb with near term futures closing above $92 per barrel. WTI gained another 5.9% on the week. Natural Gas futures swung wildly but ended the week lower by 1.8%. 
• Corn, Wheat, Palladium, and Orange Juice were the laggards last week, declining between 2.2% and 8.8%, with Orange Juice bringing up the rear.
• Orange Juice futures reversed course after a huge gain following news that this year’s crop will be the smallest in decades. Weather and tree disease have constrained supply.
• The U.S. Dollar Index (DXY) fell throughout the week. The Bank of England’s rate hike decision and hawkish rhetoric from the European Central Bank pushed currency flows in favor of the Pound Sterling and Euro all week. The Dollar bounced slightly on the heels of the strong January jobs data.
• Big Tech was a mixed bag with significant swings in either direction.
• Amazon posted very strong fourth-quarter 2021 earnings. The quarter was bolstered by its investment in electric vehicle maker, Rivian. Amazon shares jumped 13.5% on Friday, the largest single day move in nearly a decade.  
• Meta/Facebook shares fell by more than 20% on the week. The company lost $232 billion in market cap following its quarterly earnings release.
• Meta’s Reality Labs division, which is responsible for the metaverse, lost approximately $10 billion for the year.

Major Cryptos

Bitcoin

• Last week Bitcoin (BTC) traded between $40,700 and $36,300. Relative to the previous Friday, BTC rallied 7.6%.
• BTC bounced back above the $40,000 level for the first time since January 20. Perhaps the recent wave of cryptocurrency selling is over.
• The 52-week low for BTC is around $30,000.

Ethereum

• Ethereum (ETH) ranged between $2,950 and $2,500 last week.
• ETH ended the week very near highs at $2,900 and gained 16.8% week-over-week.
• The 52-week low for ETH is around $1,000.

Coronavirus

• The 7-day average COVID-19 infection rate in the U.S. has been cut in half over the past two weeks. Daily cases continue to decline rapidly. The average moved from approximately 589,000 cases per day last week to approximately 356,000 on February 4.
• 64% of the U.S. population is fully vaccinated against COVID-19 and 76% have received at least one dose of a COVID-19 vaccine. For just those 5 years and older, the numbers are 68% and 80% respectively.

COVID-19 Cases in the U.S.

Source: The New York Times

Tidbits from the News

• Food and Energy prices are not included in Core Consumer Price Index (CPI) calculations. Nevertheless, the cost of many foods has been increasing over the past 18 months. Below is a 10-year chart of the Bloomberg Agricultural Index, which tracks the price of futures on Coffee, Corn, Cotton, Soybeans (including Oil and Meal), Sugar and Wheat. Crude Oil and this basket of agricultural futures are both at the highest levels since 2014. From 1972 to mid-1980 the same index moved from approximately 35 to approximately 220. Over the past year and a half, the index moved from approximately 35 to approximately 65.

Bloomberg Agricultural Index

Source: Bloomberg

• The chart below shows the performance of a basket of growth stocks relative to a basket of value stocks. Growth stocks tend to have a higher price-to-earnings (P/E) ratio because they are valued based on expectations for growth that outpaces the broad market. Value stocks typically have lower P/E ratios. They often pay a dividend and often outperform in risk-off environments. Growth stocks have dominated since 2007. The yellow shading indicates periods where value outperformed. Value stocks are once again in vogue, outperforming growth stocks by 11% over the past two months. Will that continue?

Performance of Growth Stocks vs. Value Stocks

Source: S&P Global Research

The Week Ahead

Data to be released this week: Consumer Credit on Monday; NFIB Small Business Index, Real Household Debt (Year-over-Year) on Tuesday; Wholesale Inventories on Wednesday; Initial Jobless Claims, Consumer Price Index (CPI) Core CPI and Federal Budget on Thursday; University of Michigan Consumer Sentiment and University of Michigan Inflation Expectations on Friday.

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