Broad losses for the global equity markets while bonds rallied. The rally in bond prices/fall in yields played out despite a rate hike in the U.K. and a relatively hawkish Fed meeting. Over the last few months falling yields have been positive for growth stocks, but this week we saw some significant selling in the high valuation names. Broader still. the big indexes like the Dow and S&P 500 are masking the extent of the pain for some investors under the surface. J.P Morgan noted on Friday;
“Over the past 4 weeks, small caps and value stocks entered a correction (sold off more than 10%). High beta stocks have sold off ~30%, entering a bear market. In fact, there is a paradox that on average US stocks are down 28% from highs (most highs were recorded in the first half of the year) and the median stock is down ~21%, while the market is up ~22% for the year (Russell 3000). Such a divergence is unknown to us…”
Maybe Omicron is to blame, but the fading liquidity picture is certainly playing a role. On the last point we had three of the big central banks meet this week. The European Central Bank didn’t do much, but the Bank of England hiked rates by 0.25% despite the surge in COVID cases to new highs.
In the U.S., the Fed moved one step closer to hiking rates. As widely expected, they doubled their tapering plan to $30 billion per month. Furthermore, the consensus of the FOMC is for three rate hikes in 2022. This is a big change from only a few months ago. As you can see below, back in June eleven committee members thought there’d be no rate hikes next year, and five saw no hikes in 2023.
These two charts are actually pretty crazy. The idea the Fed knows something we don’t is completely off base. They are following the same news stories and statistics as the general public (and are as prone to emotional overreaction). They are a lagging indicator, not a leading indicator. Regardless, the odds of the first hike in March 2022 are looking more and more certain all things being equal. On Thursday, Goldman made the following comment:
“We continue to expect inflation to get worse before it gets better, and the FOMC will likely be as concerned, or more concerned, in March relative to today,” Jan Hatzius and David Mericle wrote, adding that “the leadership will surely want to show that it is responding in some way at the March meeting, though this could be either a rate hike or a hint in the statement that a hike is coming at the next meeting in May.”
Goldman’s updated timeline is below.
What will derail this timeline? The two obvious events are 1) a major surge in Omicron cases that weighs on the global economy, or 2) simply the stock market goes down too much. Powell basically said as much on Wednesday – if the market gets into too much of a tizzy they will backtrack.
Charts We Found Interesting
1. The calm before the Omicron storm?
2. Omicron is proving to be far more transmissible in South Africa relative to Delta…
3. …but the tentative good news is that Omicron’s mortality rate is very low (~25 times lower than in the previous peak on a lagged basis). But how much more stress can the hospital system take?
4. The energy crisis is everywhere other than the U.S.
5. Turkey closed its stock market on Friday and lira continued its multi-month collapse after the central bank cut rates for a fourth consecutive time despite soaring inflation. If this keeps up something is going to break in Turkey in the coming weeks.
6. What does it take to be in the top 1% of earners in the U.S.? Roughly $550K.
7. But what about globally? Just $45k in annual income. 85% of the world’s population lives on less than $30 per day.
8. What’s even more mindboggling, the energy use per person in some countries is less than a typical America fridge.
9. And just like that, 2022 is almost upon us!!
Have a good weekend.
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