Stocks are Flat on the Week: Why That's Significant

Even though they are in some ways artificial divides, people tend to reset their thoughts at the end of time periods. Thus, we take the end of each day, week, month, quarter, year, or whatever as a chance to reflect on the good and the bad. Traders and investors are no exception. If anything, they are more likely to do that than most others. In some cases that is only logical because they get paid bonuses based on quarterly performance, for example, but in others it makes very little sense. I mean, what difference does one week’s performance make in an investment portfolio targeted at your retirement, decades from now?

Still, even if we know it's a pointless exercise, we often find ourselves looking back at a week or month, trying to draw conclusions, and making predictions based on what we saw. That is particularly true when the period includes a big move but, sometimes, a lack of movement in the stock market speaks as loudly as volatile swings. This week has been one of those times.

The chart above, for S&P 500 futures over the last six trading days, tells you just how quiet it has been overall. There have been attempts at significant intraday moves, but we look like opening up this morning right around where we closed last Friday. If nothing much had happened over the last few days, that would just be an unremarkable week, but it has been a busy week for news, which tended towards the bad.

It started with what had looked like a Russian missile landing on a NATO country’s territory, killing two Polish citizens. That was presumably a mistake, not an attack on Poland per se, but wars have been started over mistakes before, and it shows the inherent risk of escalation when a hostile country is waging war on a neighbor of NATO.

Then there was the fact that, throughout the week, there was the constant backdrop of the FTX saga, with revelations coming every day. Some may say that that has nothing to do with or is even a positive for traditional assets like stocks. However, they are risk assets, as is crypto, and bad news for one can often translate into bad news for all.

On the data front, the news was generally good, but the reaction wasn’t. A less-than-expected rise in CPI, even as retail sales remained strong, hinted at a goldilocks outcome to the inflation story, where the Fed raises rates enough to turn the corner without pushing the economy into outright recession. That idea, though, was quickly stamped out by not just the Fed but by central banks in general. The Fed’s Bullard hinted at a terminal rate as high as 7% on Thursday. Meanwhile, the UK finance minister said that country was already in recession as he raised taxes and cut spending, which will make matters worse in the short-term, and the ECB have basically said on a couple of occasions this week that they are trying to engineer a recession across the continent.

And yet, through all that, stocks have, on aggregate, barely moved. That is quite remarkable, and points to a resiliency that is, depending on your view, either encouraging or worrying. It could be encouraging because it shows underlying strength; worrying in the sense that traders are whistling past the graveyard, willfully ignoring all the bad news that will inevitably cause a big drop before long. More likely, though, it is actually a calculated risk, a bet by traders and investors based on what they have seen in the past.

Remember, it wasn’t that long ago that central banks were resisting rate hikes, telling us that inflation was “transitory,” the result of supply chain issues that would sort themselves out. Now, they are taking the opposite tack with the zeal of a convert. But from a trader’s perspective, why would you believe them this time? We have just seen them flip, so why wouldn't they flop? After all, they have an inbuilt excuse, having repeatedly characterized themselves as "data-dependent."

Ultimately, then, this week is probably more significant than it first looks, but how you interpret it depends on your view of the Fed. Are they a steadfast voice of reason, giving us all the medicine we need regardless of the bad taste it leaves in our mouths? Or are they likely to be swayed by the screams of traders and big money who are looking for short-term advantage? Are they sticking with theories and models that have failed them over the last couple of years? Or are they just talking tough and will reverse course before long?

Traders are used to believing in the evidence of history. They do so every time they read a chart. It should be no surprise that they are believing in history this time too, working on the assumption that the central banks will do an about-face and, in doing so, make a soft landing possible. That is why stocks are displaying the kind of resilience in the face of bad news that we have seen this week.

It remains to be seen if the traders are right, but all of us with a stock account or 401K hope they are.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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