We Wrapped Your Kalshi Markets
Take advantage of the final weeks of volatility
The bears stole your Santa rally. Asset classes came crashing down while our Fed chair rose to a household celebrity. Despite the uncertain economic outlook for 2023, there are still reasons for traders to be optimistic for the culmination of December—and beyond.
With just under two weeks left in trading this year, we curated some of our highest-volume markets for you to take advantage of the end-of-year volatility. Introducing: Kalshi, Wrapped.
Let’s dive in.
S&P 500 Yearly Close Price
The S&P 500 racked up its second consecutive month of gains in November as investors became ever more positive that the Federal Reserve would deliver a smaller rate hike in December.
The benchmark U.S. index gained 5.4% in the month, including a 3.1% rally in the final session spurred by some very dovish words from Fed Chair Jerome Powell. Then came last week’s FOMC, which marked a reversal and Powell’s continued hawkish points.
So, despite the two-month rally, the S&P 500 remains down nearly 15% year to date. It’s on track for its worst annual return since 2008, the year of the global financial crisis.
Yet Kalshi traders remain optimistic that the stock market can sustain its bullish year-end momentum through December, a month that has historically been one of the best months of the year for the S&P 500. Markets are currently predicting a 40% chance the index value will close between 3800-3999.99.
Nasdaq-100 Yearly Close Price
If it looks like a bubble, it probably is one. That’s the lesson from the Nasdaq-100 Index just a year after its November 2021 all-time high. In the ensuing 12 months, the tech-heavy benchmark has tumbled 30%. Because the Nasdaq has a high concentration of companies in the technology sector -- particularly of the younger, fast-growing variety -- the Nasdaq is often considered to be a good barometer of how well the tech market is performing. Some of its most high-flying members have lost three-quarters of their value.
With the state of the bearish markets this year, this news shouldn’t surprise anyone. A brief glance at the index’s multiples in November 2021 would have indicated an eyebrow-raising 30x price-to-forward-earnings multiple. It marked a historical aberration, outside of the dot-com bubble of the early 2000s.
The good news is that Nasdaq-100 valuations look sane again.The index is once again trading near its average P/E ratio for the past decade. If you believe that interest rates have peaked and that the US will avoid a recession, it’s reasonable to contemplate whether the worst may be over for the Nasdaq-100.
On the other hand, it’s possible that the bizarre conditions of 2020 and 2021 inflated not just the “P” in the Nasdaq’s P/E multiple but also the “E,” the earnings. If that’s the case — and there are good reasons to think so — then the payback for the market’s 2021 height isn’t close to over.
With two consecutive months of positive returns, there has been a sense of palpable relief among market participants after a particularly bearish year. As we head into the final weeks of 2022, the fundamental underpinnings of the Nasdaq-100 remain strong. Markets are currently predicting a 32% chance the index value will close between 11000-11499.99.
Fed Rate Hikes
Things are likely to get worse before they get better. Inflation is surging and the Fed continues to talk the hawkish talk and walk the hawkish walk. Kalshi markets now forecast interest rates will continue to rise throughout the first half of 2023.
2022 has been a different story as multi-decade-high inflation forced the US Fed to end its "goldilocks" monetary policy. The invasion of Ukraine by Russia in February further added to cost pressures by pushing energy and commodity prices higher.
The Fed’s pivot to restrictive monetary policy this year has been jarring for financial markets. Just 18 months ago, the Fed was projecting that inflation would end 2022 under 2% and they would not raise rates until 2024. Going forward, Fed Chair Powell has demonstrated that he is data dependent and will quickly change policy as the economy and markets evolve. In other words, expect the actual path of monetary policy over the next 18 months to look a lot different than what the Fed is currently estimating.
The US economy slowed from the post-pandemic boom due to fading stimulus, rising inflation, Fed tightening, and surging commodity prices. The current period is best characterized by high inflation and remaining uncertainty caused by Fed tightening expectations, the Russia/Ukraine War, and China’s COVID zero pivot. Both the war and China’s COVID protests have stressed global supply chains and placed upward pressure on already-elevated inflation. Meanwhile, the Fed will continue tightening monetary policy by raising interest rates and decreasing the size of their balance sheet.
After increasing by +5.7% in 2021, GDP growth slowed in the first half of the year and has continued to climb since. Kalshi markets forecast that US GDP will end Q4 on this continued increase, currently sitting at 1.8% for Q4 2022.
So far, the most convincing evidence that a soft landing may be possible has been the resilience of the U.S. labor market this year. But the pace of job growth has slowed significantly since the first months of 2022 when the economy was regularly adding more than 500,000 jobs per month.
The only thing the holidays make more volatile than your gifting budget is jobless claims. Weekly jobless claims are volatile — especially around the holidays — and frequently subject to revision. The number of first-time claims for unemployment benefits fell to 211,000 last week, though economists were expecting claims to be 230,000. That meant a drop of 20,000 from the previous week’s total (upwardly revised to 231,000) – the lowest level since September.
Watch US wage growth, which is on track to fall back to pre-pandemic levels by the second half of next year, according to jobs platform Indeed. Meanwhile, Kalshi markets forecast the seasonally adjusted unemployment rate will sit above 4.0% in December 2022.
The Fed is reaching a critical point in its battle against inflation, and the next couple of months will determine whether or not it can navigate a “soft landing” for the U.S. economy. In other words, whether Powell will be able to tame inflation without sparking a recession.
In recent months, the U.S. housing market has softened significantly while manufacturing activity has dropped. Consumer sentiment is declining, and investors are growing increasingly concerned that a recession may be just around the corner.
Personal income and spending data releases this week are expected to give us the same thing they have this calendar year – not much. The data for November is expected to show a decline in the core inflation rate to 4.6%, the lowest since October 2021. Personal income is anticipated to soften but still remain positive. Meanwhile, consumer confidence is expected to slightly improve.
Kalshi markets currently predict annual inflation will fall between 6.0 and 6.9% in 2022.
Kalshi Markets Outlook
It’s not difficult to have a more optimistic long-term outlook on the markets now than at the beginning of last year, given their decline. Take the S&P 500, which has historically produced an annualized return of about +9.4% per year. Forecasts expect some reversion to the mean, especially after periods of very strong or negative performance. While the short-term environment is unsteady, the market would be expected to react favorably to any signs of disinflation, decreased Fed tightening expectations, a Ukraine/Russia ceasefire, or China’s continued covid policy pivot.
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