@theMarket: Fed Meeting Notes Throw Markets a Curve
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.