Santa left the party right on cue as the market turned down on the 3rd trading day of the year. The S&P has fallen over 2% over the last 3 days. The Nasdaq has taken the brunt of the selling as it is down over 5% over those same 3 days. The shift from growth stocks to value stocks is something to watch and may be an emerging trend for 2022. The S&P, Nasdaq and Russell 2000 are all at important support levels. The S&P is testing its 50- day moving average today. A break of support by any of the indices could lead to another leg down. After the strong end to 2021, a period of some corrective action is not unexpected. What happens next week will be more instructive. Be careful.
While there are some in the media that doubt that the Fed will actually begin a rate hike cycle, the bond market certainly is pricing in rising rates. The 10-year treasury yield has risen from 1.51 to 1.77 just this week. The anticipated rise in rates has made energy and financials among the early leaders in 2022. Interest sensitive sectors will be ones to watch as the Fed likely embarks on raising rates in the coming months.
Our Point
The release of the Fed meeting minutes earlier this week showed a much more cohesive Fed with all Fed governors unanimously agreeing that interest rates hikes were needed sooner rather than later. The market (particularly growth stocks) were taken aback by the unanimity and sold off in response. Many market participants seemed to have not believed Chairman Powell from earlier in December! It now looks like the first rate hike could come as early as March. We’ll see what level of conviction the Fed has and what level of market decline they may be willing to accept to achieve their policy goals. In year’s past, the Fed consistently backstopped the market with monetary policy but with inflation (not surprisingly the Fed removed transitory from their recent minutes) continuing, the Fed may be forced to choose the lesser of two evils. Today’s weak but inconsistent job report adds to the Fed’s conundrum. While jobs created were well below estimates, the unemployment rate did tick downward indicating a tight labor market. This is the time of the year when all the market pundits issue their forecasts and predictions for the year. Forecasts have ranged from doomsday to a new leg up in the bull market. The reality is that there are too many unknowns for ANYONE to make any reasonable prediction. Will the pandemic subside? Will the Fed actually raise rates or will data keep them from doing so? Will Congress flip in the November elections? Will inflation continue to rage on? Those are among the known unknowns but that does not even begin to factor in what other true unknowns will present themselves in 2022! There will certainly be surprises that nobody sees. We won’t pretend to know the future and will leave that folly to the pundits. Instead, we will continue to respond to market conditions and do our best to stay on the right side of the market. As we mentioned in last week’s note, we pared some of our risk by selling some of our equity positions. Should the current weakness persist, we will sell more. Once the market stabilizes, we will begin to seek out new opportunities. Until then, we are happy with our reduced exposure. Enjoy your first cold weekend of 2022!
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bills Asset Management (“BAM”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from BAM. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BAM is neither a law firm, nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of BAM’s current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.billsasset.com.
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About Bo Bills
Founder and Chief Investment Officer at Bills Asset Management. With over 30 years of experience in managed risk investing, Bo has helped countless clients achieve their financial goals while preserving capital.
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