Don't Fight The Fed
One of Wall Street’s long-time axioms is, “Don’t fight the FED” (Federal Reserve Board). In other words, when the Central bank is raising interest rates and increasing borrowing costs, it is being done to dampen a strong economy and high inflation. The desired result is an economic slowdown which generally, of course, is bad for equities. With expectations of anywhere from five (consensus) to seven (Bank of America’s prediction) interest rate hikes in 2022, one would think investment caution would be the game plan.
I propose to you the FED may well be on the wrong tack and is fighting yesterday’s battle. Some points to ponder follow, and if anyone wants a more lengthy discussion by all means give me a call.
Inflation –Yes, it was high last year, 7%, a 39-year record. But what about this year? Consider a few key points:
- Omicron causing a huge dent in consumer spending at every level.
- Supply chain issues continue; if you can’t find it - you cannot spend it.
- The biggest impacts on inflation were things like automobiles, lodging, and building supplies. It is difficult to see the same percentage increase in price in 2022, hence, lower year-over-year inflation numbers.
- However, note some key supply chain issues are easing – steel being a noticeable one. Reports are coming out that much of the strong US economic growth in the 4th Qtr. was due to a huge buildup in inventories.
- The Atlanta office of the Federal Reserve Board provides a lot of economic forecasts and their latest one anticipates a 1st Qtr. GDP growth of 0% – a borderline recession. Is the US going from a shortage to a glut?
- Economic growth outside the U.S. has slowed markedly, running about one-third lower than earlier in 2021. Growth in some important economies, like China and Japan, is significantly weaker.
I could go on, but the bottom line: Is the FED planning to raise rates aggressively at precisely the same time the economy is slowing? They were forced to pivot on “transitory”; will the next pivot be a reversal of planned rate hikes? Thus, could a large part of the selloff in equities this year be, not because of fears of rising rates, but rather uncertainty over a possible looming economic slowdown affecting revenues and profits in many sectors? Remember, the price action of equities is always way ahead of a company’s financial numbers and way, way ahead of the analysts’ forecasts!!
While stocks ended a roller-coaster week on a high note as a strong earnings report from Apple helped technology stocks rebound, nevertheless most major markets and sectors extended their losses for 2022. Energy prices were higher for obvious Ukrainian reasons. As a result, oil stocks did help the TSX eke out a small gain. However, the Loonie fell over 1.5%, in line with most foreign currencies, as investors decided maybe the US dollar was a safer haven for a while.
As I have stated before, I expect a volatile first half of the year for financial markets, but a much better second half, especially if the FED is forced to tone down its rate hike rhetoric.