Week of 2/28/2023 | StreetFins®

1. Rebounded

The past week saw a rebound in the three major U.S. stock indexes, with gains ranging from 2% to almost 3%, after declines of around 3% in the previous week. The S&P 500 saw an end to its three-week losing streak. However, the concern over inflation and the possibility of further interest-rate hikes continued to affect the prices of government bonds, leading to higher yields. On Thursday, the 10-year U.S. Treasury bond’s yield closed above 4.00% for the first time in four months, though it fell below that level on Friday. The 2-year note’s yield increased as high as 4.94% on Thursday, marking its highest since 2007.

The stock market received a boost from a gauge that tracks economic activity in the U.S. services sector, which reported the highest monthly reading since last June, resulting in gains of 1% to 2% for the major U.S. stock indexes on Friday. Similar expansion was observed in the services sectors of Europe and China. In February, the S&P 500 declined by 2.6%, failing to sustain the positive momentum from January when the index achieved a 6.2% gain. The information technology sector was the only one among the 11 equity sectors to post a positive result in February, while the S&P 500 ended the month down 17.2% from its historic peak reached on January 3, 2022.

According to FactSet data from the recently concluded fourth-quarter earnings season, companies in the S&P 500 posted an average earnings decline of 4.9% compared to the same quarter a year earlier. It was the first quarterly decline since the third quarter of 2020. For the fourth quarter in a row, energy was the strongest sector among all 11, with earnings growth of 57.0% in the latest quarter.

The price of U.S. crude oil recovered over the past week, climbing more than 4% to nearly $80 per barrel after experiencing two weeks of price declines. The catalyst for this increase was a report indicating positive economic momentum in China, potentially lifting the demand for oil.

2. The Great Depression and Government Involvement

The stock market crash of 1929 was a defining moment in American history and marked the beginning of the Great Depression. During this time, the stock market lost almost 90% of its value, leading to widespread economic distress and mass unemployment. In response, the U.S. government intervened in the stock market to restore investor confidence and stabilize the economy. One of the most significant government initiatives was the creation of the Securities and Exchange Commission (SEC) in 1934, which aimed to regulate the stock market and prevent fraudulent activities. The SEC implemented new rules and regulations for public companies, including the requirement to disclose financial information and the prohibition of insider trading. These measures helped to restore confidence in the stock market and contributed to the long-term recovery of the U.S. economy.

In addition to the creation of the SEC, the U.S. government took several other steps to address the economic crisis brought on by the stock market crash. The government implemented policies to increase public spending, stimulate job creation, and promote economic growth. President Franklin D. Roosevelt’s New Deal programs, such as the Civilian Conservation Corps and the Works Progress Administration, put millions of unemployed Americans to work on public projects, providing much-needed relief during a time of widespread poverty and hardship.

The government also intervened in the banking system, implementing policies such as the Emergency Banking Act, which aimed to restore confidence in the banking system by providing federal support to struggling banks. The government also established the Federal Deposit Insurance Corporation (FDIC), which guaranteed deposits made by individual consumers, providing a safety net for savers and helping to restore confidence in the banking system.

These government interventions were successful in restoring stability to the U.S. economy, although the effects of the Great Depression were felt for many years to come. The legacy of these government initiatives, including the SEC and FDIC, continues to shape the U.S. financial system today, providing important protections for investors and consumers.

3. Volmageddon

According to Marko Kolanovic, JPMorgan Chase & Co.’s top-ranked strategist, the explosive growth of short-dated options poses an event risk similar to the stock market’s Volmageddon of early 2018. These options, with zero days to expiry (known as ODTE), are estimated to have a daily notional volume of $1 trillion. The impact of selling daily and weekly options is having a similar effect on the market as in 2018. The risks involve options dealers, who take the other side of trades and must buy and sell stocks to keep a market-neutral stance. As ODTE options rarely get in the money, their market impact is mostly felt through volatility suppression and an intraday buy-the-dip pattern that results from hedging. However, should the market stage a big move that puts these contracts in the money, that would force options dealers to unwind a large amount of their positions, warns Kolanovic. The impact of these flows could be particularly significant given the current low liquidity environment. ODTE options, first taken up by retail traders during the 2021 meme mania, have gained popularity among big money managers. During the second half of 2022, such options made up more than 40% of the S&P 500’s total trading volume.

Summary:

The U.S. stock market rebounded last week, with gains ranging from 2% to almost 3%, following declines of around 3% the previous week. The Great Depression of 1929 led to widespread economic distress and mass unemployment in the U.S., prompting the government to intervene in the stock market and banking system. The explosive growth of short-dated options poses an event risk similar to the stock market’s Volmageddon of early 2018, warns JPMorgan Chase & Co.’s top-ranked strategist, Marko Kolanovic.