January 20, 2022
Good morning,
Overnight futures on the major indexes are pointing modestly higher this morning. 90 min before the opening bell, the Dow is up +120pts, while the S&P’s are up +.40% (Nasdaq is up twice that). Although we know just how untrustworthy overnight price action is in dictating what happens during the cash session, lately.
Twelve trading days into the new year and the S&P is down -4.9%, while the Nasdaq Composite and Russell 2000 are down almost twice that. What gives? What is truly unanswerable to me is why the market waited until the start of the year to react to what seemed like clear and present danger throughout December. It’s a tough business is about all I can come up with. Nevertheless, the clear and present refers to the Fed removing liquidity stimulus and raising rates. The punch bowl began to decant in December, about the same time that the Fed indicated it would likely start to raise rates beginning in March. What has seemingly changed recently, in all fairness to the market mechanism, is the rate at which the Fed may raise rates (that second derivative thing mentioned a few notes ago), has gone up. Tuesday’s big market selloff (S&P down almost 2%) can likely be attributed to the fear circulating about, that the Fed may start its rate hike cycle with a 50bps hike in March instead of the usual 25bps.
What I believe this all says in essence is that the market is adjusting to a new rate – growth regime. And it may over-adjust if inflation peaks in a matter of months as mentioned on Friday. I do not believe, nor are the technical indicators suggesting, that the correction we are currently experiencing is the start of something worse.
Be well,
Mike