Market Musings 1/6/2022
Quick thoughts on the markets and major portfolio news. Not on Ursa yet? Download Ursa from the App Store!
#RisingYields likely to be major 2022 trend. We believe Fed gets more hawkish than current plans as indicated by recently released minutes.
Updated January 7, 2021
Massive #Flight2Safety value rotation first week into 2022. Overall S&P 500 lower down -2%, but Growth significantly underperforming Value by over 5%.
So what’s going on? Investors’ #InflationFears trended all 2021 ending with December’s Consumer Price Index (CPI) up +6.8% Y/Y. To combat, Fed retired conservative ‘transient’ inflation moniker and accelerated asset tapering and #RisingYields plans. Despite changing market environment, Growth stocks added to stellar 2020 gains surging over another +30% in 2021.
However, #RisingYields concerns elevating through Santa Rally week (last week of Dec) and into the new year. Compounded by detailed Fed minutes released Wednesday indicating quicker balance sheet reduction under consideration. We definitely expected and have been saying the Fed would need to get more aggressive with quicker rate hikes than its December meeting commentary, but moving to reduce balance sheet assets quicker was a surprise.
What’s reducing the balance sheet? As we explained in a Market Musings last year, the Fed has been adding to the balance sheet by purchasing treasury and other bond assets in large quantities ($120B per month) since #COVID19 started to offset pandemic impact. Reducing the Balance Sheet would be the opposite－removing assets (though typically allowing purchased assets to mature without replacement vs. selling). Investors expected ending asset purchases and rate hikes to combat #InflationFears, but considering balance sheet reduction as well indicates Fed may become even more aggressive.
What does this have to do with Growth stocks? While volatile on near-term sentiment, longer-term stock valuation is typically based on expected cash flows or returns. Growth stock valuations typically rely on rapid growth and therefore value is largely derived from expected returns sometimes multiple years out. To compare near-term returns to long-term returns, investors use what’s called a discount rate－basically an expected rate of return for the level of risk. While #RisingYields increases the discount rate for ALL assets, Growth stocks are impacted most due to longer time horizon for returns.
We expect #RisingYields to be a major 2022 trend and into next year. We continue to believe the Fed may get even more hawkish than current plans as indicated by the recently released meeting minutes.
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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.