Motion Sickness
The Great Revaluation continues with significant volatility that is causing motion sickness. The major indices posted losses for the month of January; the S&P 500 returned -5.3%, the Dow Jones -3.3 and the tech-heavy NASDAQ -9.0%. The month-end number masked much of the carnage that occurred during the month. At its worst, the NASDAQ was down nearly 20%. In the last week of January, the indices experienced several episodes of seismic 5% price swings…intraday! It is all part of the Great Revaluation and it is likely not over just yet for several reasons.
The Federal Reserve Bank has made its policy projections clear. Tapering will end in March. Fed Funds will increase by .25% in March to be followed by quarterly increases through 2022. Even the possibility of balance sheet reduction (Quantitative Tightening) is on the table. Of course, the equity markets don’t like higher interest rates, but this projection was very much the consensus; no surprises here. And as discussed before, the equity markets should be more than capable of absorbing Fed Funds at 1%! However, with persistent and pervasive inflation, the fear is the Fed will be forced to take a more aggressive stance. Other central banks are joining the hawkish fray. Today, the U.K. raised rates and the European Central Bank refused to rule out rate increases for the Eurozone in 2022. In their last statement, they said rate increases were “unlikely.”
Omicron has created increased economic uncertainty. Clearly, the economy slowed in December and January. The initial read of 4th quarter, 2021 U.S. GDP was 6.9%, a nice surprise! However, the Atlanta Fed recently released its initial forecast for 1st quarter 2022 GDP. It was 0.0%! Even after adjusting for the inventory noise, that is a pretty big shift in economic activity. Indeed, the projections for January non-farm payrolls (due out Friday, 8:30am) have been steadily reduced and several forecasts for negative payroll growth are out there. Is this an Omicron slowdown that has already passed? Or is it the beginning of a prolonged slowdown. So hard to tell and it is contributing to the motion sickness.
On a positive note, corporate revenue and earnings have generally been good. Companies that have posted decent 4th quarter earnings have been rewarded and their stock prices have held up nicely in the market correction. That said, the Spec Wreck continues, as former tech darlings with disappointing earnings have seen their share prices decimated. Last night, Meta (FB,) formerly known as Facebook, released disappointing earnings and the stock is down -25% today! Ouch! That said, this earnings season has brought another reason for concern. Companies have been citing both growth and inflation concerns and are either reducing or eliminating their forward-looking earnings forecasts.
Lastly, inflation remains problematic. While there appears to be some isolated improvement in the supply chain, disruptions across a wide swath of industries persist. Labor shortages are everywhere! And the supply of energy remains well below projected demand. Persistent and Pervasive Inflation!
It is unlikely that any of the above concerns will disappear in the near term. Therefore, volatility will continue as revaluations take time. For the run and gun speculators, I fear many of their high-flyers will be permanently grounded. For long-term investors, earnings remain solid, interest rate hikes will likely be modest, and the Omicron curve is improving as we approach the end of winter. There is good reason to stay the course despite the unsettled environment. Motion sickness indeed! Someone pass the Dramamine!