This has been a difficult January from a financial markets perspective. Equities and bonds were both down. We can mark when equities began to fall in earnest to the release of the notes from December’s Federal Reserve meeting in which it was revealed what we already knew: the Fed had shifted to a hawkish monetary policy. It is interesting that the bond market believed what the Fed was saying in December, but the equity markets took until the release of the notes to put 2 and 2 together.
Let’s take a minute to look at the good news coming out of the markets right now. This has been a good earnings season so far. Companies are full of hope for this coming year. They have been able to pass cost increases onto the end users (us). This is good for the sustainability of earnings power in an inflationary environment. It means that people are still buying products even with price increases. We have also seen mentions of the supply chain crisis beginning to abate in some quarterly earnings calls.
High yield spreads are still compressed. When high yield spreads widen, that means that there is stress happening in the credit end of the bond market. Usually, we see high yield spreads push out significantly when there is forward looking anxiety in the equity markets. As of this time, the high yield market is still calm. When we look at inflation, there is now a consensus view that the Fed will hike more than 5 times in 2022 in their efforts to quell inflation. Our base case is that inflation could moderate on its own as the supply chain
continues to heal. So raising rates will serve to tamp down inflation even faster than if left to its own devices. If inflation continues, it will take a toll on demand and that in itself would cause moderation. We believe that a modicum of market unease coupled with a real decline in the inflation rate would cause the Fed to pause their hiking.
Now for the bad news. While we believe that inflation will moderate itself over the coming year, it will not do so in the short-term. This means that the Fed will hike at least a few times. We don’t know if this has all been priced into the equity markets, though it most likely has been priced into the fixed income markets at this time. The Fed is painted into a corner with its official dual mandate of full employment and inflation control. We can add to that a third and unofficial mandate of keeping asset prices from falling too far. This is the first time in a long time that the Fed must choose between curing inflation and propping up a falling stock market.
Any company that does not report very positively is getting crushed. There is no forgiveness in the market right now. If a company wavers or reports slightly down, they have been getting crushed. The VIX has spiked up over 30 this month. When the VIX is over 30, that means that >2% intraday moves will be commonplace. This much volatility can make people uncomfortable, as they can be up 1% in the morning and down -1% by the close. It can be difficult to gauge which way the market is heading.
How this all resolves itself remains to be seen. Most corrections resolve themselves to the upside relatively quickly, and so it is best advised to not do too much in reaction at this point. We are watching and have a plan no matter which way the market moves.
Performance is no guarantee of future results. Trend signals are proprietary research of EWM Investment Solutions, a wholly owned subsidiary of Executive Wealth Management, LLC. Data source for returns is FactSet Research Systems Inc. This chart is not intended to provide investment advice and should not be considered as a recommendation. One cannot invest directly in an index. Executive Wealth Management does not guarantee the accuracy of this data.
As was mentioned in our last newsletter, the EWM Investment Solutions Asset Allocations models increased their exposure to low volatility domestic equities on Monday, January 24th, in response to the recent market turmoil.
On Friday, January 28th, the Equity Dividend model removed a position in the financial services sector. There were no other trades in the remaining EWM Investment Solutions models during the week ending on January 29th,2022. The major equity market sectors remain in a long-term favorable trend, and the Asset Allocation models are near their maximum allowable equity exposure with domestic stocks favored over international shares.
On a Lighter Note
Skunks, what’s their deal? Since the 1940s, scientists have known that the striped skunk likes to bounce around accosting black cats with Frenchified amorous advances — but what about the other species of stinkers? Well, as reported in the latest issue of Popular Science, the lesser-known spotted skunk really likes to do handstands. According to recent footage from wilderness cameras, when feeling threatened, the spunky skunkies will go to a handstand before unleashing an acrobatic and aromatic attack on the potential enemy. Some scientists believe that the balancing act makes for a more effective odoriferous assault. However, other researchers think that we are besmirching the behavior of the spotted skunk. Postulating that the wilderness cameras were actually positioned upside-down, these people believe that the spotted skunk enthusiastically jumps up for a double high-five when other critters are nearby. The spotted skunk is just awkwardly trying to make new friends not aggressively attacking outsiders. So is it a handstand or a high-five? We’ll probably never know the real answer, and the truth most likely lies somewhere in the middle – maybe a horizontal recumbent stretch. Nevertheless, the issue has become the most contentious scientific squabble since the stalagmite-stalactite debate about the topsy-turvy caverns of Carlsbad, New Mexico.
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Returns are calculated as indicated below with reinvested dividends not considered except for the Barclays U.S. Aggregate Bond Index. Data source for returns is FactSet Research Systems Inc. The London Gold PM Fix Price is used to calculate returns for gold.
1 Week = closing price on January 21, 2022 to closing price on January 28, 2022
1 Month = closing price on December 28, 2021 to closing price on January 28, 2022
3 Month = closing price on October 28, 2021 to closing price on January 28, 2022
YTD = closing price on December 31, 2021 to closing price on January 28, 2022
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