The First Trading Day of 2022 Is Just Another Day
Since I was asked WHY rates were moving this way, esp in light of MarkitPMI — which honestly seems underwhelming to ME at least at this stage of my game.
And with MarkitPMI and the DAY 1 bond selloff-A-thon in place, the question remains worth considering … WHY or better yet, what if anything, DAY 1 says about rest of the year. Well, Bloomberg’s Cam Crise (aka Macro Man) offered an attempted answer. I’ve highlighted what I thought useful,
The First Trading Day of 2022 Is Just Another Day
To those who enjoyed a bit of a break during the festive period, the first morning alarm of the new year can often feel a little bit jarring. No matter how eager you might be to get stuck in with a completely blank year-to-date slate, the body requires a bit of an adjustment after a week or so of lie-ins. That’s evidently not the case with the mind, with investors picking up where they left off for much of 2021. But how much does the first trading day of the year tell us about what’s to come? In truth, not a tremendous amount. For investors, the first business day of 2022 is going to be one like any other.
It’s no secret that everyone wants to start the new year off on the right foot. There’s nothing quite like having a nice tailwind before the year has even properly got going. And with P/Ls reset to zero with the turning of the calendar, early price action can have a disproportionate impact on the market’s psyche. But how much does it tell us, really?
After all, it was only last year that the equity market laid a dinosaur-sized egg on the first day of trading, with the S&P 500 dropping nearly 1.5%. That was the one and only decline during the first week of trading, and obviously the market shrugged off that inauspicious start to post excellent returns for the year as a whole. But that’s obviously just an isolated observation taken during a time of exceptional circumstances. What does a broader sweep of the data suggest?
Probably unsurprisingly, the equity market’s performance on day one of the year offers relatively little insight into how things will unfold over the ensuing 12 months. The scatter plot is little more than a blob, which makes plenty of sense. After all, the things that are going to drive the narrative this year -- the resilience of growth, inflation, and earnings, monetary and fiscal settings, and of course, public health -- aren’t going to be resolved today, this week, or this month.
Are Treasury markets any more perspicacious in their ability to divine the next 12 months’ price action on the first day of the year? Marginally, perhaps. When yields drop on the first trading day of the year, that’s been a pretty good sign of a bond rally, at least since 1990. When yields decline on the first trading day of the year, on average they have dropped by 48 bps over the year as a whole (with a hit ratio of 64%.) When yields rise on day one, however, the average change over the course of the year is just 7 bps. That tells us pretty much nothing.
In recent years, the performance of the bond market on day one has perhaps been a little more astute; since 2010, the correlation between the day-one yield change and that for the year as a whole has been 0.42. That’s a relatively isolated phenomenon, however; since the end of the GFC, for most assets there is basically no relationship between day-one performance and that of the ensuing 12 months. The first trading day of the year is just like every other one.
One interesting little nugget that emerged from this analysis is that gold has enjoyed a 10-year winning streak on day one of the new year. At the time of writing, that looks to be under significant threat, with bullion down a little more than 1%. Of course, as the correlation table above suggests, this tells us nothing about the medium-term future for gold. Still, it’s interesting to note that one pattern of behavior has changed.
The big questions of the year revolve around how growth will downshift, whether supply shocks will ease, and how policy will react -- all in the backdrop of shifting public health trends. Markets might vote with their feet on the first day of trading, and it’s tempting to project that trend into the future.
But while early trading will obviously dictate how year-to-date P/Ls will look, for the most part it doesn’t offer any particular insight into the coming year. Your body might be struggling to readjust to being back on the desk, but it too will soon realize that day one is ultimately just another trading day.
Food for thought … Don’t read too much into it, though, seems to be decent advice.