One other strong quarter for US fairness markets and as we had highlighted in our This autumn forecast, the trail of least resistance within the fairness area was increased (SPX +5% in This autumn, +20% YTD). As we shut out the 12 months, dangers surrounding Fed coverage have elevated amid Washington’s considerations over inflation, which in flip has prompted the Fed to taper asset purchases at a faster tempo and mission three charge hikes in 2022.
Alongside this, with Fed Chair Powell additionally retiring “transitory”, the hawkish transfer is considerably harking back to the Fed’s 2018 pivot when Fed Officers acknowledged that the steadiness sheet unwind was on autopilot. It took a turbulent year-end for fairness markets to immediate the Fed to reassess their autopilot view.
My view stays that the largest danger to equities is Fed coverage over Omicron considerations. Consider, that whereas the Omicron variant is extra transmissible, information has up to now proven signs are reportedly much less extreme than the Delta variant. What’s extra, the financial influence of every variant has diminished with economies higher capable of function with social restrictions.
Determine 1. Fed 2018 Hawkish Pivot
Determine 2. Fed 2021 Hawkish Pivot
That being mentioned, whereas the priority going ahead shall be a transfer to tighter Fed coverage, it is necessary to do not forget that through the first half of the 12 months, stimulus shall be at its strongest. Subsequently, the bias for equities is more likely to stay in purchase the dip mode, with a return to a contemporary document excessive.
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