Market Musings 1/26/2022
Quick thoughts on the markets and major portfolio news. Not on Ursa yet? Download Ursa from the App Store!
Fed commentary alluded to increasingly aggressive stance, but didn’t provide much concrete details. We continue to believe Fed will need to get more aggressive through 2022 to combat #InflationFears.
#RisingYields fear has fueled bearish market sentiment to start 2022. S&P 500 has fallen -9% YTD since Jan 3rd peak and approaching correction territory. Tech-heavy NASDAQ already breached correction threshold down -16% since Nov 19 peak.
Entering 2022, expectations were set for Fed asset purchase taper finishing in March with 3 rate hikes through rest of year. However, ongoing elevated #InflationFears with Dec CPI growth hitting 7% and hawkish Fed Dec meetings minutes revealing earlier balance sheet reduction on the table escalated expectations. Cumulating with some analysts forecasting more than 4 rate hikes in this year－an extremely aggressive shift in just 4 weeks. Accordingly, market sentiment has tanked across all equities but high-growth names hit hard in particular.
All eyes on this week’s meeting to see if Fed confirms more aggressive expectations or takes foot off the accelerator just a bit to soothe deteriorating market conditions. Fed commentary alluded to increasingly aggressive stance, but didn’t provide much concrete details.
Some key takeaways include:
- Fed is “of a mind” for first rate hike in March, but not fully committing yet (but it’s likely).
- “Quite a bit of room to raise interest rates without threatening the labor market”, but no projections released.
- Balance sheet reduction could start “later this year” and reduce “sooner and faster” than prior.
We thought the Fed commentary felt a bit of a cop out. While alluding to new hawkish forecasts as potentially necessary, Fed avoided making any concrete commitment. The vague guidance may be to soothe rocky equity markets, but the Fed can’t slow play 2022 like 2021. Fed admitted to underestimating inflation which has likely slightly worsened since Dec with lack of progress on #SupplyScare issues. We continue to believe Fed will need to get more aggressive through 2022 to combat #InflationFears.
While magnitude of #RisingYields and speed of balance sheet reduction still in flux, we believe market expectations of accommodating Fed policy has been reset. Growth volatility likely remains very sensitive to rate hike expectations, forecasts and general sentiment－a headwind we don’t see easing this year. We’ve recently reduced the majority of our stock recommendation ratings on Growth names. Despite adverse market conditions, we still believe #Flight2Safety Value rotation, #COVIDRecovery economy plays and easing #SupplyScare beneficiaries (including #SemiShortage) can outperform this year.
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The statements, opinions and analyses presented here are provided as general information. This article is the opinion of the author. Anything within this article should NOT be considered an investment recommendation or advice. See Ursa’s full disclosures here.