Market decline

Is the stock market decline over for now?

A decline -10% or more from the most recent peak is considered a “correction”.

Some Wall Street bulls note a drop in bond yields yesterday which they say indicates that the recent sell-off may have played out. Bears, however, suspect that falling yields are just a speck on the radar, with many still predicting 10-year yields to hit +2% by the end of Q1 and perhaps eventually top 2.3% to 2.55 before capping.

‘Bubbles’ fueled by the Fed’s easy money policies

The pullback in stock prices has created a more “risk-free” mentality that has also spread to other alternative assets like cryptocurrencies which bears say are massive “bubbles” fueled by money politics easy from the Fed.

New and lingering issues that threaten to contribute to or extend existing inflationary pressures into 2022 have led to dramatic recalculations of the Federal Reserve’s next tightening cycle, in turn increasing downward pressure on more price-sensitive stocks. rate.

As recently as early December, most Wall Street insiders expected the Fed to raise rates four times, in 25 basis point increments. Now expectations are growing for two 50 basis point hikes, as well as possibly two 25 basis point hikes. There has also been speculation that the initial rate hike, which is expected in March, could be one of the biggest moves of 50 basis points, an outcome which some fears could send waves of shock to global financial markets.

Another dramatic shift is the expectation that the Fed will begin shrinking its balance sheet by nearly $9 trillion this year, which Wall Street at one point expected to begin in 2024 at the earliest.

The Fed meets next week on January 25-26. Before that, investors are eager to see policy updates from other global central banks, starting today with the Bank of Canada and then the European Central Bank on Friday. The Bank of Canada is expected to raise its benchmark interest rate amid relentless inflation similar to what we have seen in the United States

The ECB, on the other hand, is expected to maintain its current policy, with most officials still betting that inflation will recede with the pandemic. Unfortunately, current signs point to even higher global energy prices, which will ultimately translate into higher gasoline prices for consumers, as well as higher operating costs for companies, which will also likely be passed on.

Oil prices rose again yesterday after a pipeline burst that will temporarily halt some exports, on top of existing disruptions and global supply issues.

The latest data shows that global oil inventories have continued to decline in 2022 as several OPEC+ members struggle to meet their production increases.

Data to monitor

Today, economic data includes the Philadelphia Fed index and existing home sales for December. It should be noted that the December housing starts and permits data released yesterday are both well above trade expectations.

The November figures were also revised upwards. Earnings releases include American Airlines, Baker Hughes, CSX, Netflix, PPG, The Travelers Company and Union Pacific. Next week, we’ll start looking at big tech giants and other flagship companies like Apple, Boeing, Caterpillar, IBM, McDonalds, Microsoft, Tesla, and Verizon.

Some bullish insiders suspect that strong results from a few of the major US companies could lure investors, perhaps paving the way for a massive rebound, especially if the Fed issues a less hawkish policy update than expected next week.

On the other hand, many fear that if Apple, Microsoft or Tesla were to turn around, it could trigger a massive sell-off. I think we are clearly at an inflection point with a change in Fed leadership and over 40% of our money and fund managers being too young to trade or invest in both a rate and an environment. rising inflation. It will be interesting to see how some have chosen to navigate these waters.