January 5, 2022
Good morning,
It’s a Fed day of sorts, the minutes of the last FOMC gathering – the one where they doubled the pace of taper and released a new dot plot – are set for release this afternoon. Worth noting, rates have recently jumped up – the 10yr UST yield is up almost 20 bps in the past week to 1.66% this morning. Is it any wonder we’re seeing a bit of air come out of the speculative tech (growth) bubble?
The Nasdaq Composite Index was off 1.5% yesterday and is looking down another .50% this morning ahead of the open. The S&P 500 Index, by comparison, was off small yesterday (-.06%) and is about equally unchanged ahead of this morning’s open.
With the Santa Rally period officially past, I am not excited about what the market has to look forward to now. The seemingly uncontrollable spread of Omicron and the removal of the Fed’s Punch Bowl. The rate of removal is very critical, of course, but there’s no denying that the days of artificial stimulus are over. I am not fear mongering and expecting a market collapse, but I do think a another consolidation is in order, and maybe a bit larger than the past two we had in September and November. I am alerted to this from the NDR-model used in non-taxable accounts. Benchmarked against a 60/40 index and after spending most of 2021 at 80-100 percent equity (the very definition of overweight), we now see a slightly lower than benchmark equity weighting coming from the model.
Is there potential for a stagflation scenario ahead, one in which the rapid spread of Omicron inhibits supply chain improvement at the same time that wage pressures mount? Inflation rates would continue to ascend, sending expectations upward and lifting bond yields to new highs. The Fed and other central banks would be compelled to raise rates more aggressively, flattening yield curves and raising economic worry. Investors would require better valuations – another way of describing multiple compression. I am not saying this is going to happen, I think it’s a possible worst case scenario. Though I do think no-alternative-to-equities will limit the downside, I just want mindsets prepared for the chance of a stiffer consolidation than what we’ve seen in the recent past.
Be well,
Mike