The start of 2022 has presented a bit of a wobble to an unstoppable bull market in play since the Covid induced lows of 2020. The S&P 500 is struggling here between making new highs and falling below its 50-day moving average, a level it has tried to test at least 10 times over the past year and held each time. Everyone was hoping for the Santa rally that never happened. The market has been quite shaky since the start of this year, and the big question on everyone's mind is, will it hold this time around?
One of the biggest concerns for the market has been the timing of the Fed induced liquidity coming to its end. The Fed has printed close to $4.5 trillion in buying Treasury and MBS assets, which makes its way back to the broader S&P 500 via bond buying. This in turn aids the large-cap stocks like Apple (AAPL) , Amazon (AMZN) , Alphabet (GOOGL) , and others, the large six that make up at least 20% of the market cap of the index.
This is why looking at the index is a bit misleading as if one were to take a look at other racy growth indices like (ARKW) , as the real technology stocks are down between 50%-70%, and more. Valuation was always used as an argument for buying these funds, but in essence investors were just buying a play on lower rates and higher QE. Inflation is a big issue in the market and liquidity is being withdrawn on a rate of change basis across the board, which never bodes well for the Tech sector.
The Fed has been ignorant about the perceived level of inflation, it is certainly not transitory, despite their claims, and it seems they are finally throwing the towel in. The latest CPI print showed 7% YoY growth in the Consumer Price Index for December, the fastest for 40 years! Price increases were seen across the board from food, clothing, gasoline, and rent shelter inflation to goods and others.
Also, the Fed has pumped so much money in the system in such a short time that aggregate demand spiked combined with supply chain shortages causing a surge in prices. There is a big gap between the PPI and CPI, suggesting corporations will be facing margin pressure if they do not raise prices further. These prices do not seem to be easing any time soon, to the detriment of the Fed. Arguably, one wonders why they are still doing QE of any sort today, even if buying $90 bln per month down from $120 bln per month, when markets are at all-time highs. They should have ended this QE months ago and if anything raised rates to quell the surge in prices across the board.
They've always played a reactionary role - they react to put out fires as opposed to preempting them. When economies were opening up last year, and demand was surging, they should have normalized their balance sheet. But the Fed is always backward looking, as now that the economy seems to be running out of juice, they are talking about tapering and potentially raising rates. This is why the market is unsure where to go for now.
They're in a bit of a Catch-22 situation, as continuing claims plunge to 1.559 million, the lowest since 1970, indicating a very tight labor market. This was one of the key objectives for the Fed which has been met, yet inflation is certainly not averaging their goal of 2%, so they really should be raising rates, but fear a financial collapse if they did. The system is too big to fail, one wonders when this crazy experiment of MMT will end, or whether this time we will see the global reset or yet more money printing?
Time shall tell which path the Fed embarks on. Could it take a decision at their next FOMC meeting on January 25th or will they wait till March? It seems that the bond and rates market are ready to test the resolve of the Fed, forcing them to uncover the actual level of the Fed put. Something has got to give, either input prices need to fall giving the Fed some room to breathe or markets need to, but are investors and institutions ready for that?