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Financial markets not showing too much stress, even as the crypto complex gets dismantled

This is the daily notebook of Mike Santoli, CNBC’s senior markets commentator, with ideas about trends, stocks and market statistics. Predictably but persistently hawkish Fedspeak weighs on the Treasury yield curve, which in turn helps to keep equities on the defensive, as an orderly but uncomfortable pullback in the indexes continues. The S & P 500 is now about 2% off Tuesday’s intraday high, which itself was 15% above the latest bear-market low set in mid-October, the pullback at this point is pretty contained, bouncing a bit off October’s high and holding a couple percent above the 3,850 area where a solid rally would find support if it got there (20-day average). The midday bounce attempt could be related to anticipated upside bias with options expiration Friday. November expiration tends to be up some 75% of the time, according to the Stock Trader’s Almanac. Tough dynamic to game profitably, but people try. Several Federal Reserve voices pressing the case that rates will keep rising, if even at a slower pace, and that solid evidence of inflation’s retreat is needed before a pause in tightening. There’s not one bit of this message that is inconsistent with how the bond market is now priced, with expected Fed funds above 5% into early 2023. But the bond market is further pricing in the implications of that policy, which include heightened recession risk. And so the 3-month/10-year yield spread deepens, a leading — sometimes long-leading — precursor to recession based on history. Those circles where this spread went below zero were typically well ahead of the eventual recession. And, interestingly, the stock market at the point of that inversion was always either flat or up over the prior 12 months. This time when it went negative last month, the S & P was down 15% over the previous year, implying an imperfect fit for the historical pattern or perhaps saying this episode is more like the inflationary 1970s when stocks were weak ahead of inversion. But the point is, stocks have not been oblivious to slowdown risk to this point. Retail earnings in general show decent aggregate top-line spending but perhaps the limits of tolerance for price increases are near and retailers are more focused on cutting costs/preserving margins/working off inventory where necessary. Energy stocks continue to pull back, off 2% this week after the sector barely surpassed its year-to-date high, still showing a vast divergence in recent months vs. crude prices. Part of this is because energy firms are nicely profitable even at $75-$85 crude and are the rare group showing earnings growth. But there could be some crowding/momentum-chasing at work, too. There’s much focus on value’s comeback vs. growth but other more focused strategies have held up well – mostly related to real cash flow and the risk/reward trade-off of quality and growth. Here’s dividend stocks and “growth at a reasonable price” compared to the broad market over two years: The dismantling of the crypto complex proceeds, with Coinbase shares giving up 17% this week and sitting more than 85% below their peak price, with the company’s bonds also trading at steep discounts even though the company holds plenty of cash. So far, the financial markets have not shown particular stress over the crypto unwind. It’s hard to pinpoint any fundamental impacts yet, though massive wealth destruction there is, if anything, disinflationary at the margin. Market breadth is weak but no washout, 60%/75% downside volume on Nasdaq/NYSE. Almost no movement in VIX, with modest index moves, expiration often pinning indexes in a narrow band and holiday-slowed trading ahead next week.

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