A blast from the… future

Stocks traded lower yesterday after mid-term election results bubbled in with no real decisive revelations. The crypto market took another drubbing as crypto broker FTX teetered on the edge of bankruptcy.

A good vibe is hard to find. Yesterday’s trading session for stocks served as a reminder that there is still a whole lot of anxiety out there with unknowns still outnumbering knowns. A lot has been made of the mid-term elections that are… er, still, sort-of going on. It’s not clear who was predicting a red wave which would have seen the Republicans throw the Democrats out of Congress onto their ears, but needless to say there was quite a bit of speculation on the matter. If the bookmakers and the pollsters were right, investors wanted to make sure that they were on the right side of the red wave trade. Well, it is now Thursday morning, and we still don’t know all the results of Tuesday’s vote, but we do know that control of Congress will be slim and that the red wave was not quite as dramatic as some would have wished for. Needless to say, it looks like the most likely result of the mid-terms will find mixed control over the legislative branch. As I highlighted in my writing, markets tend to perform best when there is a Democratic President and split control of Congress. In other words, markets are happier when radical changes are not abounded, and a power split between Dems and Republicans almost guarantees that scenario. Even if Republicans did manage the red wave, the Democratic President’s veto power would be sure to quash any radical, politically charged legislation. So, really, the market got what it wanted. So why the aggressive selling?

We cannot ignore what occurred in the past few days in the crypto markets. I suppose I could just sum it up with the words of FTX- founder and crypto wunderkind Sam Bankman-Fried who told investors on a conference call yesterday that he “… f---ed up” (his words not mine). Well, regardless of the colorful language, FTX, the once-high-flying crypto exchange, ended up with an $8 billion shortfall and requires at least $4 billion to avoid bankruptcy. I reported on this earlier in the week when rival Binance appeared to offer the company an escape route by making a takeover bid. Yesterday, it was reported that Binance had abandoned its offer, leaving FTX once more on the brink of bankruptcy. Making matters worse, clients have aggressively been withdrawing their holdings from the platform since the news broke. Bankman-Fried was probably not a household name for most of you, but he is well known in crypto markets having amassed a fortune which was estimated at around $26 billion… just a few short days ago. It has been reported that his wealth, now severely diminished, is worth less than $1 billion. Ya’ think? Ok, so what does some rich-kid, crypto-fan-boy, phenom have to do with you and me? Well, you see crypto has been slowly but surely entering the mainstream of the investing universe, rightly so. Many investors in crypto don’t fully understand the underlying investments and ultimately treat cryptos like speculative growth stocks. That said, a considerable amount of investable capital – mainstream investable capital – has been allocated to crypto investments of one kind or another. So, when one of the largest crypto exchanges announces that it may end up in bankruptcy, the entirety of the investment universe, meaning traditional stocks, is effectively…er, infected. Many are wondering if this could be a Lehman moment for the crypto world, and I am sure, I don’t have to remind you how that turned out. That said, yesterday’s strong selloff in stocks was most likely accentuated by the FTX news.

Adding to all that uncertainty and discomfort is the usual suspect: inflation, which will be reported on later this morning with the release of October’s Consumer Price Index / CPI. Economists are expecting the annual rate to have slowed to +7.9% from +8.2% while the monthly change may have picked up slightly in pace. Regardless of the actual numbers, which are way too high, any material deviation from expectations is likely to be followed by market volatility. The Fed made it quite clear that its inflation busting is far from over. This has left markets expecting a +50 basis-point rate hike with a high probability of a +75 basis-point boost next month. Today’s release is just one – albeit a big one – of the many factors which will be weighed by the FOMC next month.

This market still has quite a bit of uncertainty to contend with. Some from old, existing ailments and some from new ones which we didn’t even know existed. Over time, those uncertainties will become certainties, but at the moment, volatility… and anxiety is still with us. Stay focused, be patient… it will pay off.

YESTERDAY’S MARKETS

Stocks sold off yesterday on uncertain election results, a potential crypto bankruptcy, and anxiety about today’s CPI release. The S&P500 fell by -2.08%, the Dow Jones Industrial Average lost -1.95%, the Nasdaq Composite Index traded lower by -2.48%, and the Russell 2000 Index declined by -2.68%. Bonds traded higher and 10-year Treasury Note yields lost -3 basis points to 4.09%. Cryptos sold off by -13.05% and Bitcoin lost -15.87%.

NEXT UP

• Consumer Price Index / CPI (October) may have ticked lower to +7.9% from +8.2% leaving Core CPI at +6.5%, down from +6.6% in September.
• Initial Jobless Claims (November 5) is expected to come in at 220k, slightly higher than last week’s 217k claims.
• Today’s Fed Speakers: Waller, Harker, Logan, Daly, Mester, and George.