We do not regard current market action as favorable; it is likely the harbinger of a possible near-term correction. As we indicated in our last letter, we believe that 2022 will be a year marked by volatility; the inflation landscape, the Fed’s evolving response, and potential political turmoil surrounding mid-term elections all suggest a year of ramps, declines, and rotations. Beyond a core portfolio of long-term holds, tactically minded investors would be well-advised to attend to rotations (which we have observed and other analysts have noted have become faster and more difficult), sell ramps, and buy declines in areas of thematic interest when they are more appropriately priced. Overall we would not be surprised to see a flattish year in the S&P 500 during 2022, with several corrections, and index-holders on a roller-coaster that ends up with a small gain or loss. Selling ramps and buying dips will be one method to harvest that volatility to improve on broad market performance.
As expected, the Fed has finally retired the word “transitory,” doubled the pace of its taper of crisis-policy asset purchases, and teased three rate hikes in 2022. In the opinion of Allianz’ Mohamed El-Erian, it was “slightly more hawkish than consensus expectations (though somewhat less than what I think is needed).” The acceleration of the unwind of crisis policy is, on the face of it, dollar bullish, and bearish for gold and tech stocks trading on untenable multiples of earnings or even of revenues.
On the other hand, tax-loss sales of gold may be reaching a point of exhaustion, setting the stage for gold to begin responding in its more traditional fashion to inflation anxiety.
El-Erian’s suggestion that the Fed’s shift was not hawkish enough is likely connected to inflation, which at 6.8% CPI and 9.6% PPI is running at levels not seen for many decades (indeed, if you account for changes in inflation calculations, the highest ever). We’ll update our in-house real-world inflation measure, the Guild Basic Needs Index, next week.
Needless to say, the market’s initial positive reaction to the Fed announcement and press conference is not the last word; the initial positive response was probably related to buying by funds which had reduced overall exposure to stocks ahead of the announcement. We remain cautious on the beneficiaries of speculative fervor.
We noted last week that the “pandemic crisis was over.” To clarify, this does not mean that the virus is no longer spreading, that vulnerable populations are not still at risk, or that the subject will disappear from the news. In this letter, we focus on the economic, financial, and monetary ramifications of current events — and our observation is simply that markets have pretty much digested pandemic risks and are moving their concern to the Fed.
Thanks for listening; we welcome your calls and questions.
