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What the Market? - Jan 31, 2022
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What the Market?
Mr. Market whipsawed this week after seeing earnings reports of some of the world’s biggest companies and hearing the outcome of the Fed’s first meeting of 2022. Equity markets rallied on Friday and finally broke their 4-week losing streak (if Mr. Market can snap a losing streak, maybe the New York Jets could too?). Putting aside wishful thinking - uncertainty, and a changing panorama, will continue to be the focus of investors in the coming months. Between Powell’s hawkish messaging, Russia and Ukraine’s kerfuffle, and mixed corporate results, expect volatility to continue climbing (we’re already up 73% in 2022).
What’s driving the market?
Disable Training-Wheel Protocol: Fed Chairman Powell told Mr. Market it’s time for him to start pedaling on his own again. Wednesday’s update reinforced the Fed’s shift towards hawkish policy and the possibility of an interest rate hike as early as March. The fedspeak is strong with Powell, but the message was quite clear, the Fed needs to address inflationary pressures. Inflation rose 7% in December, and the Fed needs to reign it in to about 2% without causing a recession or crashing the interest-rate sensitive financial markets. To do so, the Fed will need to lay out a clear plan that investors can follow and believe in - if they don’t, prepare for more turbulence. The silver lining though, the Fed believes the economy doesn’t need its training wheels anymore, you go Glen Coco!
Slap Bet! The Fed Version: If you’ve never agreed to a slap bet before - good on you (we can’t say the same), however, when getting into a game of slap bet with the Fed you best make sure you talk to your doc and get some Lorazepam on deck - the anticipation is excruciating. Investors will now have six weeks to obsess and overthink how the Fed plans to execute its interest rate hike. How steep will the raise be? How many times this year? When? Up to how much? Even major investment banks can’t seem to get their stories straight with some banks estimating four hikes in 2022 within a range of 1-1.25% to others with estimates of six hikes closer to 1.5%. Oh the uncertainty! The only assurance we have for 2022 is that the rate hike will remain significantly below the neutral policy rate (meaning interest rates will continue stimulating the economy, but at a slower pace), so please don’t panic just yet.
A note on the Russia-Ukraine situation: Aside from the Fed’s turnaround in monetary policy, the second largest of the known unknowns in the market is the escalating situation between Russia and Ukraine. Russia is the world’s 3rd largest producer of oil and gas and one of Europe’s largest energy suppliers (about 40% of total supply). The conflict is already increasing energy supply pressures, and should the conflict escalate, it is possible that it will trigger a commodity price shock (i.e., Russia invades, the US et al. issue sanctions, Europe loses its energy supply, and prices skyrocket). No one wants that, and Mr. Market is anxious enough as is. At this point, a military escalation seems unlikely, so hopefully once everyone is done posturing in the annual game of geopolitical Risk tensions will ease and energy markets will stabilize. Keep an eye on the conflict as it won’t be resolved overnight and bursts in tensions are expected. Expect the media to blow this story out of proportion.
What’s an investor to do?
There was virtually nowhere to hide during the recent slump as valuations came crashing back down to Earth. Valuations were stretched in 2021 and January’s correction should come as no surprise. That being said, the times, they are a changin’, as the market shifts from high growth and inflation towards moderate growth and currency stabilization. As the paradigm shifts, some investors have opted to cash in on their profits and wait for Fed and global political tensions to settle. This is a great time to rebuild and restructure your portfolio to re-enter the market with a fresh strategy. A few considerations:
Ask yourself, who will benefit and who will hurt from rising rates? Consider getting exposure to banks and financial services that will benefit from this environment, and expect value stocks to outperform growth stocks in the coming months.
Volatility creates buying opportunities: The tech sector has taken a significant haircut across the board unnecessarily dragging down many strong companies. Take advantage of recent sell offs to buy great companies with strong growth prospects at low prices (think cloud, big data, cybersecurity, and other infrastructure technologies).
Follow the money to net-zero carbon projects: Between recent losses, increasing energy tensions from the Russia-Ukraine story, and the growing popularity of renewable energy sources it may be a good time to enter the sector. Consider a broad approach via ETF investments in:
Keep an eye on the economy
Jobs Report: Employment data will take the limelight on Friday. Investors will be looking to understand the impact of the latest COVID wave on job creation and the relative strength of the labor market as the Fed takes away the economy’s training wheels. Analysts expect the economy to have added 150k jobs with unemployment remaining unchanged at 3.9%.
The Curious Investor
No deep-dive this week
Financial Services: PayPal
Freight & Logistics: UPS
Energy: Marathon Petroleum
What we’re vibing:
Deephouse Set by Marsh: The latest set by British DJ Marsh set at Seven Sisters Cliffs is yet another absolute beauty. Be it to lay back and enjoy after a long Monday, or as a background for work-related endeavors, this set should help you get through whatever the day throws your way.
Jay Larson - Wrong Number: An oldie, but a goodie. Jay Larson never really blew up too big as a comedian but he nailed it with this bit. If you haven’t received the fake business-text scam on WhatsApp yet, you’ll want to watch this so you know what to do when it comes.
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