3 Factors Driving the Markets and How I'd Be Positioned

It is difficult to believe that it is only Jan. 18 given all that is going on during a hectic start to the year. I see several key factors driving markets: End of Omicron? The U.K. seems to be following a very similar pattern to South Africa. The surge in cases, setting new records for cases already seems over. Hospitalizations, which moved somewhat higher, never approached the peak hospitalizations with the original outbreak, nor the Delta variant. Deaths have barely moved up from what sadly seems like steady state levels. There are already some data points indicating that this pattern is occurring in the U.S. The good news is Omicron could be the stepping point we need to treat the pandemic as more endemic. Having said that, the market has already largely priced this in. Inflation and the Fed For the first time in over a year, I think the market and the Fed are more concerned about inflation than they should be. I still believe higher inflation (3% to 4%) for longer (three to five years), but I don't see the Fed getting to four rate hikes this year and even the talk about aggressive quantitative tightening is starting to seem overdone. The bad news is that inflation is a hot topic for politicians and that is causing substantial political pressure to be exerted on the Fed. The good news, I hope, is that the Fed hasn't forgotten that they can often jawbone the market to get the reaction they need. At the moment, jawboning, has the additional benefit of appeasing the politicians. From a risk standpoint, this one is a bit tricky, as market is still digesting what the Fed has been saying. Near term, I expect this to put more pressure on stocks, but I am not overly concerned about bond yields going a lot higher from here. Geopolitical Risk: Russia and the Ukraine In my job at Academy Securities, I have the pleasure of working with 15 retired generals and admirals. While there is a range of opinions on the subject, consensus is that an invasion of Eastern Ukraine is the most likely outcome, followed closely by a negotiated settlement. Kiev is off limits and withdrawal of pressure without concessions from NATO/Europe seems very unlikely. A potential invasion (or incursion) would likely be done with some plausible pretext so that the promise of no future desires for more land coupled with promises to deliver energy should be enough for Europe to acquiesce. Sadly, from a humanitarian perspective, that is largely priced in. At this stage, either of the two most likely scenarios would ease energy prices. Positioning and Trading Rates. I still like owning some TIPS, especially since I think the rate pressure at the long end will ease. I will follow up with more details on how to allocate within the income market, though it will be along the lines of our fixed-income outlook published at the start of the year. I am NOT selling fixed income or credit products here, but I'm not adding either. Equities. I still like simpler stories. The dividend stocks of the world. I still don't like the FOMO (fear of missing out) stocks or the TINA (there is no alternative) stocks. That definition is a bit loose but I think it is easier to identify the FOMO/TINA stocks and sectors and continue to reduce risk there. I am still overall in risk reduction mode in stocks, but nibbling at the areas I like. For the first time, in a while, I am taking profits/locking in gains on cyclicals, especially energy. Crypto. I remain bearish on crypto here. The inability to get a sustained bounce is likely to turn some alleged HODLERs into sellers. There could be a time where I like crypto again, but that is not now!

3 Factors Driving the Markets and How I'd Be Positioned

For the first time in over a year, I think the market and the Fed are more concerned about inflation than they should be.

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