This 1st Week of February 2022 Thoughts

One of my clients recently asked what to expect once the Fed began to raise interest rates: the answer can be seen in the yellow “circle” below. This was the last time Chairman Powell began raising the Fed Fund rate in the fall of 2019. Rising interest rates signal a change in the economic cycle and prompted me to begin my 9th Inning Investing Series to prepare clients for volatility.

In 2019 rates needed to go higher but the former president created such a storm of bad sentiment towards the Fed, I honestly think Chairman Powell “blinked” and reversed this decision. The market then resumed its climb up, but before raising rates was on the table again, the Pandemic hit, and we then went into survival mode. These last few weeks have been the market grappling with the reality that it was time to pull the Band-Aid off. The Fed is now getting ready to raise rates, like it did in 2019 and this is the cause of the daily volatility.

Why does this matter to you? This chart goes back to 2012: notice the upward trend. Yes, there were down times in 2015; 2018; 2019 and 2020. But the market continued its climb UP. Spend some time looking at this chart…even print this out and put it on your refrigerator. Every week, we’ll talk about where we are in this process, what I see happening, and how to capitalize. The key with bear markets is to not become so frozen by fear that you don’t make the smart moves you need to, so you are better off on the other side of it.

From Bloomberg’s Vildana Hajiric, reporting on famed market watcher Jeremy Siegel’s market call:

A “rocky” stretch for U.S. stocks is far from over, with the tech-heavy NASDAQ indexes poised to fall into bear markets thanks to the Federal Reserve’s newfound zeal to undercut inflation, according to Jeremy Siegel, 76-year-old finance professor at the Wharton School, University of Pennsylvania.

The long-time academic said he expects more than four interest-rate hikes this year, a risk that “equities are not really priced for.” He sees a 20% decline in the NASDAQ from the November high.

Day by day, stocks slide precipitously or shoot up each time dip-buyers emerge at the close. Siegel sees a bear market brewing for the wider tech heavy NASDAQ and that the S&P 500 will also fall by more than 10%.

“On Wednesday Powell was firm and pretty clear,” Siegel said in the interview. Siegel sees inflationary pressures in the economy persisting throughout 2022 and prices could rise another 7%, like last year. A host of technical signals also suggests that more volatility may be coming. Siegel sees more fundamental challenges ahead, from the Fed struggling to snuff out price pressures to the spreading omicron variant undercutting first-quarter economic expansion.

Why does this matter to you? When the FED pivots, someone goes through the windshield. We are starting to see some serious-stocks-through-the-window action:

• Everyone is long risk assets: aka too many have too much in stocks.

• Everyone is long the same risk assets: aka too many own the handful of tech darling stocks.

• Valuations are at or above 1999 levels for most fundamental measures: aka too many stocks too high.

• Leverage in the system is tied to the Fed’s interest rate policy: aka too much easy money.

This first month of 2022 is what I call the start of a “huge-hedge-fund-hotel” unraveling and I can’t help but remember the “roach motel” commercials. Hedge-fund-hotel-stocks occur when too many hedge funds chase after the same stocks: group-think takes over they can’t imagine that these darlings will ever go down. The problem isn’t that they bought at the same time…but that they might decide to sell at the same time and there is no one left to buy…as seen in Facebook (Meta) yesterday.

What else is unraveling is the Home-Bound Class of 2021: the pandemic traders that used the phone-app Robin Hood, now down from $77 to $13.58. These un-tested traders hoped the music would keep playing: instead, facebook’ s earnings disappointment sent shock waves through the internet sector and it is now down 20%. This is not the time to think that just because a stock is “down” that it might be a good buy. DATE! Our next client meeting is coming up on February 22nd