Last week was very turbulent because the Fed minutes triggered a sector rotation favoring value stocks, particularly banks, insurers, and car manufacturers. These are buybacks at a bargain price, considering the December portfolio grooming. 2022 is expected to be as volatile as 2021 if not more. Bottom line is that If the Fed raises rates, expect an immediate dip in equities and real estate.
The good news is that the surge of the Omicron Covid cases is having little impact on the market. This is due to the fact that the symptoms are generally very light.
The release of minutes from Wednesday’s Fed meeting reminded me that the beginning of the year wasn’t as quiet as it seemed. However, there really wasn’t anything new except that investors are reminded of a Fed rate increase due to rising inflation. The US central banks have been well aware of increasing rates steadily to reduce inflationary damage and keep the labor market inefficient.
Vice Chairs of Blackstone Advisory Partners ($649 Billion AUM), Joe Zidle, and Byron Wein released a note to clients regarding their expectations for 2022.
Blackstone expects that the S&P 500 will not make any progress in 2022. They expect value stocks to outperform growth and, in line with other analysts, expect a correction not exceeding 20% during the year.
Blackstone executives believe that inflation will continue to rise through 2022 and end the year at no lower than 4.5%. According to them, inflation will be the dominant theme in 2022 due to climbing rent prices and rising wages.
Europe is also discussing inflation. The first estimate for December shows a 5% annual price rise, higher than the forecast (4.8%). The December employment numbers in the United States surprised many: very few new jobs were created, but the unemployment rate dropped again.
Since the start of the year, the euro/dollar pair has remained relatively stable at the pivot point of USD 1.13 per 1 EUR. Traders have a slightly higher chance of economic slowdown due to the rate policy in their strategies.
Rising Bond Yields?
The Fed minutes were released, pushing the yield on US 10-year debt up to 1.72%. This is a rational response even though actual rates are still firmly in the negative.
The German Bund is also in good shape, even though its yield on 10-year US debt has risen to 1.72% from -0.33% today to -0.07% in just two weeks.
Given the US monetary development, this is quite logical. A good Fed analyst will tell you that the short-term interest rate curve almost predicts a rate increase in March, three 25 basis points increases in 2022, and a policy rate of 1.75% within three years. This will have a negative effect on equities which we explain below.
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Macro Takeaways & Next Week
Most of Wall Street and we don’t think equities will perform very well, and investors will most likely move toward value away from growth. More money will likely be transferred out of equity markets as bond yields increase in safer interest rate investments such as CDs and bonds.
The current S&P 500 dividend yield is 1.27%, significantly lower than the long-term average of 1.86%. A critical point to watch is 1.75% which I think money managers will start making moves.
The European unemployment rate for November and the US Consumer Price Index and Production Index will be released this week.
Crypto (Long Term Bullish)
The cryptocurrency market has been in a bleak mood lately. After dropping nearly 40% in two months, the $69,000 bitcoin peak in early November seemed far away. At the time of writing, bitcoin is hovering at $40,000.
The cryptocurrency market’s total market capitalization has also fallen by more than $1 trillion, from $3 trillion to less than $2 trillion. Digital assets are in for a rough week ahead. Is it possible that we are entering a bear market? Personally, I think it is just a correction due to the shutdown of miners.
Commodities (Gold, Oil, and Ag)
Oil – Bullish
The year is starting on a positive note for oil prices. Prices have increased five times in a row, aided by disruptions in North America’s production, as well as in Kazakhstan, which has declared a state emergency. WTI, the US benchmark, temporarily broke the USD 80 mark, while Brent trades around USD 82. Don’t be surprised if we break $100 in 2022 due to inflation and regulatory pressures.
Gold – Bullish
Gold has fallen over the last five days, and the precious metal is not gaining favor among investors despite rising risk aversion. Gold has fallen below USD 1,800 once more, and silver is also losing ground at USD 22.1. However, we believe that “Gold Bugs” will see their day in 2022-23 with a 20% increase due to inflation.
Other precious metals
The rising energy costs in Europe support zinc and aluminum prices in industrial metals. Europe is still feeling the effects of high natural gas prices, and European smelters have to cut their production, which causes prices to rise.