One other strong quarter for US fairness markets and as we had highlighted in our This fall forecast, the trail of least resistance within the fairness area was larger (SPX +5% in This fall, +20% YTD). As we shut out the yr, dangers surrounding Fed coverage have elevated amid Washington’s issues over inflation, which in flip has prompted the Fed to taper asset purchases at a faster tempo and challenge three charge hikes in 2022.
Alongside this, with Fed Chair Powell additionally retiring “transitory”, the hawkish transfer is considerably paying homage 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 threat to equities is Fed coverage over Omicron issues. Bear in mind, that whereas the Omicron variant is extra transmissible, knowledge has up to now proven signs are reportedly much less extreme than the Delta variant. What’s extra, the financial affect of every variant has diminished with economies higher in a position to function with social restrictions.
Determine 1. Fed 2018 Hawkish Pivot
Determine 2. Fed 2021 Hawkish Pivot
That being stated, whereas the priority going ahead can be a transfer to tighter Fed coverage, it is necessary to keep in mind that through the first half of the yr, stimulus can be at its strongest. Due to this fact, the bias for equities is prone to stay in purchase the dip mode, with a return to a recent document excessive.
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