MARKETS AND INVESTING
February 11, 2022
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
The S&P 500 has experienced a good bounce over the past couple of weeks- up ~8% from the lows. It is not abnormal to get sharp snapbacks like this after getting too stretched to the downside. But it is also normal for back-and-forth trading to transpire in the aftermath as the market rebuilds itself internally. We do not believe the market is ready to rush back to highs, but also do not believe it is justified to go much below the recent lows. And it could take months for equities to fully digest the recent volatility, along with investors gaining information on inflation and adjusting to the Fed’s rate hike cycle. Technically, we will be watching resistance at ~4600 and support at 4222-4279. We would not be surprised for range-bound trading to transpire in the lead-up to the March FOMC meeting over the next several weeks. But with overall conditions likely to remain healthy, we recommend using pullbacks in favored stocks (particularly to support levels) as opportunity.
January CPI rose to a 40-year high at 7.5% y/y. While the hard inflation data has yet to positively inflect, we do continue to see indications of thawing bottlenecks and lower inflation in the soft data. This week’s January NFIB Small Business survey shows the decoupling of actual price changes and expectations for price plans in the months ahead. Likewise, actual compensation changes (wage growth) were very high in January but expected compensation has rolled over. We also see indications of thawing bottlenecks in the supply chain data, which collectively should be a precursor to easing inflationary pressures. Some inflation is good, but investors need these expectations of a moderation in inflation to come to fruition in the coming months in order to take pressure off corporate margins, valuations, and the need for an aggressive Fed.
The Fed is not only set for liftoff in March, but investors are now putting 82% odds of a 50bp hike at the meeting. Policy normalization alone is not a major risk to equities, but it does leave the market more vulnerable to negative influences. Just as ultra-accommodation acted as a backstop for investor sentiment over the past year and half, negative headlines and uncertainty should lead to more volatility and weak periods for equities as the backstop gets removed. The trajectory of inflation will ultimately be a large determinant on whether or not the market lows have been seen or can rebuild for renewed upside. We are hopeful that inflationary pressures can ease over the coming year, but we also do not expect a linear trend- and choppiness in the data is likely to lead to uncertainty and choppiness for equities in the lead-up to rate hikes. With the market now pricing in 1.8 rate hikes in March, at least 1 rate hike at each of the next 3 meetings, and 6 rate hikes this year, easing inflation could potentially lead to positive surprises in Fed actions- which would obviously be a welcome sign for investors.
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