There is a more than an even chance that the Federal Reserve Bank hikes interest rates at least 25 basis points by the end of March 2022. Several analysts expect another three hikes by the end of the year. As an equity investor, this should concern you.

 

This week, both the Consumer Price Index (CPI), and the Producer Price Index (PPI) came in as expected. But "expected" does not mean anything like good on the inflation front. On a year-over-year basis CPI was up 7 percent, while PPI hit 9.7 percent for all of 2021.

 

And while economists debate whether inflation and economic growth will subside over the course of this year, the Omicron variant is throwing a big kink into those forecasts.

 

In my Jan. 13, 2022, column "No Shows Threaten Economy," I pointed out the millions of workers in the global labor force who have been forced to stay off the job while recovering from this highly contagious variant. It has also created additional delays in the supply chain. Container and cargo congestion is building among the world's 20 largest ports.

 

Since much of the inflation rise has been caused by supply chain problems, the short-term impact of more delays indicates to me, a higher rate of inflation going forward. As such, the Fed seems honor-bound to raise rates faster (and maybe at 50 basis points, instead of the expected 25) in order to deliver on their promise to contain inflation.

 

But the bond vigilantes over in the fixed income markets have already taken matters into their own hands. They have bid up the U.S. Ten-Year Bond yield to 1.72 percent. At one point this week, it climbed to above 1.8 percent. Most bond traders are now expecting yields to rise to 2 percent through the next few months.

 

As such, foreign investors, who usually line up to buy U.S. Treasury bonds in the government's frequent auctions, have not been as eager to do so. This week's 10- and 30-year auctions were meh, at best. None of this has been good for the stock market.

 

If you have been reading my columns, you know that technology companies do not do well in an environment of rising interest rates. The high-flyers, that is stocks with little or no earnings but huge price gains, have been bearing the brunt of the downward pressure. But even the big guys are feeling the pressure at this point, with the NASDAQ 100 down 10 percent from its highs.

 

Every time these market favorites try to get up off the floor, they are pounded down again. Investors, trained to "buy the dip," are getting their fingers chopped off. In fact, underneath most indexes, everything that qualifies as speculative, whether it's crypto, electric vehicles, marijuana stocks, Fintech, etc. have been all been taken to the woodshed.

 

Those readers who have followed my advice have hopefully avoided much of the carnage. If you haven't acted to reduce the leverage in your portfolios, there is still time. I am expecting that we will see an oversold bounce in the stock market on Tuesday next week for a few days. Why?

 

Earnings season is now upon us. Most investors eagerly anticipate the "FANG" companies' results and usually buy stocks in anticipation of that event. Since they are such a large weighting in the overall market, great FANG earnings usually buoy the entire market. As such, I would expect the same thing will happen again.

 

The fly in that ointment is that while earnings may be stellar, guidance won't be. Between the omicron variant, supply chain issues, inflation, and the Fed's tightening stance on interest rates, the near-term future that FANG executives see, I'm guessing may not be as rosy as many investors expect.

 

If I am right, and the markets do bounce, take that opportunity to reduce exposure to the overall market. I am still looking for a serious correction in the weeks ahead. If the correction is steep enough, chances are that the Fed might back off on further tightening, but at this point that is just a supposition based on past Fed behavior. In any case, we'll cross that bridge when we come to it.

 

Last week, economists calculated that almost 5 million workers failed to show up at their jobs. Given the present upsurge in cases of the Omnicom variant, that should come as no surprise. However, it clearly has Wall Street economists reducing their estimates of first quarter 2022 GDP.

 

Slower economic growth normally has a negative impact on everything from the stock and bond markets, interest rates and employment. How this will ultimately affect the economy in the months ahead is a question worrying every trader and portfolio manager in the financial markets.

 

The first warning sign that this wave of coronavirus infection was impacting business came during the holidays. Thousands of flights, we thought, were canceled due to weather-related concerns and maybe some no shows due to the holidays. It soon became apparent that employees from pilots to baggage handlers and everyone in between were getting sick, or forced into quarantine, by the omicron variant.

 

Since then, a wave of omicron infections has decimated the working forces of supermarkets, shipping ports, transportation hubs, and a variety of factories and food processors throughout the country. I am starting to notice this personally. Just Wednesday, as I stood in a long line at my local supermarket, I noticed the lines seemed to be getting longer, even though holiday shopping is long over.

 

First, my concern was simply maintaining the 6 feet of spacing since most shoppers were ignoring the footprint markers behind me. Masked, gloved, and behind a plexiglass partition, my turn finally came. I asked the clerk why the lines were so long.

 

"A lot of people are out sick," said the weary, masked clerk. "So why not hire more people?" I asked. In response, she just laughed, nodding towards the "help wanted" signs behind her. I noticed her nose was poking out from the top of her mask. I held my breath.

 

The clerk also lamented that her schedule was in chaos, since no one knew which employees would be sent home tomorrow to quarantine, or who would be sick and how long it would be until they returned. "It's the same kind of thing you normally see when there is a big snowstorm. Some make it in, most don't." 

 

And what is happening stateside is also developing throughout the globe. Europe has been struggling with the same issues. China, due to their strict isolation policies, has been managing somewhat better than most countries — until recently. This week, China's Zhejiang Province, home to one of the country's key ports, has suspended or greatly reduced the transportation of manufactured goods and commodities into Ningbo port, thanks to an outbreak of omicron last week.

 

Unfortunately, Ningbo is one of a handful of the world's largest container ports and an integral link in the world's supply chain connecting producers in East China with buyers of everything from automobiles, electronics, semiconductors, heavy equipment, machines, clothes and even toys. A second major port city, Dalian, a city of 7 million, announced its first cases of omicron Jan. 12, threatening the closure of its port. As a result, ships are heading for Shanghai's huge container port, which is causing congestion and delaying shipments by at least a week.

 

In August 2021, the port was shut down for a couple of weeks because of COVID-19. Analysts estimated it cost the world about $4 billion a week during that shut down. As it stands, global shipping ports have been working to reduce the congestion that has stranded an armada of container ships along their shores. Here in the U.S., the government has made efforts to relieve the port congestion in Los Angeles. On the East Coast, the New Jersey and New York ports have until recently managed to keep up with port congestion. However, omicron is steadily reducing the number of longshoreman available. As a result, the line of ships building off the coast of Long Island is increasing daily.  

 

During the course of the last week, several economists have downgraded their forecasts for the first quarter 2022 GDP. Some are simply postponing growth, pushing it out to the second quarter. Economists are arguing that while Omicron may hurt growth in the short-term, the variant will flare out, and growth will resume in time to show higher by May or June. Let's hope they are right.

 

Investors were set back on their heels this week after reading the latest member comments from the Federal Open Market Committee's December 2021 meeting. It suggests that the Fed is prepared to tighten far sooner than most expected.

 

Members seem to say that the Federal reserve bank central bank was prepared to shrink its $9 trillion balance sheet "much sooner and faster" than anyone expected. This is in addition to the already announced plan to reduce its asset purchases faster than they first planned. Couple that with expectations that we could see three interest rate hikes this year and one can understand why stocks dropped this week.

 

The U.S. Ten-Year Treasury Bond yield spiked to the highest level seen in months at 1.74 percent. That sent technology shares plummeting, especially those of high-price stocks with little or no earnings prospects. The prospect of monetary tightening raised fears of a coming recession and with it a declining stock market.

 

This caused a stampede into "old economy" stocks that actually earn money and boast a strong balance sheet with little debt. Value stocks suddenly found their mojo again but when the markets take a nosedive like they did on Wednesday, Jan. 5, few stocks escaped the carnage.   

 

The risk I see is that a handful of stocks hold the key to overall market performance and most of them are technology stocks of some sort. Higher interest rates are like kryptonite to the technology sector and pose a real threat to the markets overall.

 

Apple, Microsoft, Nvidia, Tesla, Amazon, Facebook, and Google are included in the majority of mutual or exchange traded funds, and most of the large cap equity indexes. I would venture to say that they represent at least 25 percent of most indexes.  If for any reason these stocks begin to falter, they could take the entire market down with them. I think that is a real possibility, if the Fed carries out its new program of tightening and I believe they will.

 

There is a healthy debate among investors over whether the Fed, in the face of a large market sell-off caused by their actions, would have the stomach to carry out their plans. That is understandable given how long the Fed has had our back. In times past, most notably in 2018, the Fed has come to the rescue when markets suffered a severe decline.

 

The problem in that belief is that it places the Fed between a rock and a hard place. Inflation is impacting the nation, especially Main Street, (where America's voters live). It is an election year as well, and President Biden and the Democrats are hurting in the polls. The president wants something done about inflation and Jerome Powell, the Federal Reserve Bank's Chairman, has been tasked to do just that.

 

The dilemma is how does he cool inflation, and at the same time avoid precipitating a whoosh down in the stock markets by raising interest rates. I really can't see how Powell is going to accomplish that without hurting the markets in the process. However, I believe the circumstances of higher inflation, possible slower economic growth, and the present surge in the latest coronavirus variants will pass by mid-year, but in the meantime, prepare for more stock market turmoil ahead.

 

Next week, I expect more volatility with gains and losses depending upon the day, but the trend should be up, at least slightly ... I have been predicting a 15-20 percent decline ahead in the stock market in the first quarter of 2022. It could begin as early as the end of next week. Nothing in the market's behavior this week has changed my mind about that.

 

On the surface, it was a good year if you were in the veterinary business. Year-over-year sales grew by 9.1 percent, while patient visits increased by 3 percent. For pet owners, however, not so much.

 

Owners found that the cost of keeping their pets healthy jumped by about 10 percent. Some of that price increase was due to higher fees, but consumers were also purchasing more products and services.

 

My chocolate Labrador Retriever, Titus, is now 13 years old. The rule of thumb: every year of a dog's life equals seven years of my life. That would put Titus' age at 91, versus my age of 73. I won't detail all his health ailments, suffice it to say that he is in the vet's office just about every other week. Those visits last for 30-60 minutes and we usually leave with medications. The cost fluctuates between $175 and $375 per visit (not counting the meds). In contrast, I saw my doctor twice last year and the one medication I take is free. 

 

Just like human medicine, veterinary medicine is experiencing new advances and frequent discoveries. Universities and pharmaceutical companies worldwide are stepping up their research, conducting quality trials, and achieving breakthroughs that are providing an entire range of modern medicines. As such, surgical procedures are now commonplace. Conditions, which in the past would spell end-of -life decisions by owners, are now treatable.  

 

Pet cancer treatments, for example, were practically unheard of twenty years ago. Today, the Veterinary Cancer Society estimates one in four dogs will develop cancer (and almost 50 percent of dogs over the age of 10). As a result, more and more vets are treating cancer, but at a cost.

 

Specialist visits to confirm cancer can run upwards of $1,500. Treatments are expensive — chemotherapy ($200-$5,000), radiation ($2,000-$6,000), drugs ($50+ per month). A cancerous pet can set you back $10,000 or more. And unfortunately, more and more pets are showing up with cancer.

 

To make matters worse, there is no such thing as Medicare for your dog. That means there is no government program to reimburse the veterinarian cancer hospitals, so they pass the full costs on to the pet owner.

 

What about pet insurance, you may ask? Unfortunately, many new pet owners don't feel the need to buy insurance for their pet until after it is too late. But even if you have pet insurance, most policies only cover half the cost, and typically pet insurance requires that you pay upfront.  

 

Titus doesn't have cancer, thank goodness, but he did have a herniated disc where his tail meets his spine a few years back.

 

That little operation cost $15,000 -- about the price of a European vacation (which we decided to forgo in favor of the operation). But as Titus aged, his hind quarters are giving out, while the arthritis in his shoulders continues to worsen. As a result, his prescription medicines are crowding out my own in the medicine cabinet and there is no Prescription D plan to take care of the costs. The most we can look forward to is more of the same. Bottom line — we love him — so it's worth it to us.

 

But don't think that your local vet is minting millions from your pet's misfortunes. If all they cared about was money, they would have entered another field like dentistry or human medicine. There aren't that many vet schools in the U.S. and all of them are highly competitive. The cost and duration of the education is similar to the cost of a human medical school. But the average salary of veterinarians is less than half of what medical doctors pull in. New vets have low starting salaries and high student debt payments as well.  

 

Supplies, equipment, and facility costs are equivalent to human medicine expenses. Staffing costs are lower, but a highly skilled and well-trained staff still costs money, especially in an environment of labor shortages and high turnover. In addition, the stress and pressure caused by the pandemic has taken its toll on vets. Omicron just increases those challenges. In the meantime, the increase in demand for veterinary care has exploded.

 

All in all, be grateful that you have a vet to go to when needed. Expect your vet bills to continue to increase. The best thing you can do is begin to practice preventive care. Regular vet care is important, even when nothing is going on. Vaccines, spaying and neutering, dental cleanings, flea and heartworm prevention, bloodwork and yearly exams are critical to keeping the big bills in check.

 

The Santa Rally continued this week with the S&P 500 Index hitting a new record high. Most stocks that gained did so on little volume. Don't read too much into this week's gains, however.

 

There is an old, rarely used term called "painting the tape." It is a mild form of market manipulation where market traders buy and sell securities among themselves to create an appearance of substantial trading activity. The goal is to fool investors into buying into stocks, sectors, or the market thereby driving prices higher.

 

These kinds of tactics often result in an unsustainable spike higher in the averages, followed by a period of consolidation, or decline. The back half of the week stocks consolidated but we will have to wait until the next week to discover the market's next move.

 

This week most newsletters, brokerage houses, and investment advisors were releasing their forecasts for 2022. Those predictions span the gambit. Some are buying value; others are buying growth. Many are simply arguing to buy both since they have no idea what will outperform. Most on Wall Street are sticking with large cap technology, arguing that they are both defensive and aggressive (go figure). Selling the high-flying, Kathy Wood stocks, seems to be a popular call. Bottom line — no one knows.

 

However, just about everyone will be taking credit for fabulous 2021 returns. Few will remind readers that it is not difficult to make money for their investors when the S&P 500 Index is up 25 percent for the year. If truth be told, credit for those returns should go to the United States government.

 

The Federal Reserve Bank's massive monetary stimulus, coupled with trillions of dollars of fiscal stimulus, created those gains in the stock market. Of course, no one wants to acknowledge that. But that era may well be over.

 

Last week, I warned readers that government stimulus is now winding down.

 

The U.S. central bank is planning to raise interest rates soon. Worldwide, some central banks are already doing just that. At the same time, fiscal stimulus is also declining. In the U.S., President Biden's Build Back Better spending plan is expected to be the last such program on the docket, if it is ever passes. Experts give it less than a 50 percent chance of succeeding.

 

So, let's keep this simple. Ignore the debate on how high inflation will rise (or not). Forget the arguments on when the supply chain bottlenecks will ease, or whether Omicron will be the worst, or even the last, variant to afflict the world. Answers to those questions are merely guesstimates anyway.

 

What we do know is what the government plans to do. Given their intentions, it is hard for me to believe that the economy can continue to grow at its present rate, while shutting off the spigot of all this government money. Common sense would tell you that the economy will take a hit, growth should slow, and with it, corporate earnings, which brings us to the stock market.

 

Sometime in the first quarter of 2022, I expect a rather serious correction in the stock market due to the government decline in stimulus. I have stuck my neck out and pinned late January, early February, as a possible start date for this event. What should you do?

 

I advise readers to hire an investment advisor as a first step. They will be able to maneuver through what I suspect will be a difficult year (or years) better than you can. If that is not an option, I suggest you reduce risk.

 

Move to a more conservative portfolio. Consumer durables, telecom, REITS, healthcare are some suggestions, but these sectors have already risen in price substantially in December. Make no mistake, however, if my call proves correct, you can expect losses no matter how conservative you may be. What I do not suggest you do is sell everything and move to cash.

 

For one thing, I could be wrong. Second, stocks could continue to rise over the next few weeks, or months, even if I am ultimately proven right. And after correction, I expect markets to bounce back. Very few will know when to get back in. So, stay invested, just not as aggressively.