The first week of 2022 was miserable for most of the stock market. There have been concerns for a while that inflation was building and bonds were faltering, but the market has been trying to ignore the issue for a while.
Worries about a more hawkish Fed have been pressuring some growth stocks and small caps, but on Wednesday, the minutes of the last Fed meeting were released, and the market was surprised by the level of hawkishness.
Expectations for rate hikes jumped sharply following the release of the minutes. There is now a 90% chance of a quarter-point hike in March and then a series of monthly hikes after that.
The Fed may not be as hawkish as feared, but it spooked the market and triggered one of the most aggressive rotations in years out of growth stocks and into value, financials, and growth stocks.
The jobs numbers on Friday morning didn't help as the unemployment rate dropped more than expected, and wages were stronger than anticipated. The jobs market is strong, and that is adding to inflationary pressures.
The basic problem is that the market has not fully priced in higher inflation and interest rates, and much of the discounting has occurred on a very uneven basis, with small stocks and growth names bearing much of the selling pressure while big-cap names and indices held up.
The indexes and FATMAAN names finally succumbed to some of the pressure this week, but the gulf of performance between those stocks and much of the rest of the market is still enormous. It is going to take a while for the market to deal with this inconsistency, and it is not at all clear how it will be resolved.
The good news is that there are some tremendous opportunities developing, but the market just doesn't care right now. Action like this always leads to great stock picking, but we have to wait for the price action to improve.
Have a great weekend. I'll see you on Monday.
