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Market Participants are Wringing Speculation Out of the Market

CAMS Weekly View from the Corner – Week ending 1/7/2022

January 10, 2022

Over the past few months we have shared various angles on what is essentially a central theme: The Federal Reserve’s “transitory” price inflation assurance has not unfolded as offered by policymakers for the bulk of 2021. With this, consequences have spilled out onto the market and societal landscape.

Consequences have come in the form of on-going multi-decade high price inflation data. We have seen follow-on wage demands from labor which has turned them into their own pseudo Labor Unions as they quit existing jobs for greener pastures in search of better wage packages. In the market landscape a simultaneous theme had developed whereby companies who were better positioned to pass through cost increases to their consumers were treated better by market participants as maintaining profit margins became a focus of said participants.

Then as we pushed into late 2021 we began to see the Federal Reserve itself quietly suggesting – to then more blatantly offering that financial conditions would need to tighten faster than previously offered. In fact they retired the “transitory” phrase while speeding up the previous plan of ending their on-going emergency money printing program (Quantitative Easing – QE) dating back well over a year.

With the speeding up of ending the QE program they have also suggested interest rates would increase sooner than previously offered.

Furthermore, as of the release of the most recent Minutes from the Federal Open Market Committee (FOMC) meeting they also have discussed not only the end of the money printing (QE) but actually reducing their balance sheet which can be simply thought of as “de-printing” if you will, which is known as Quantitative Tightening – QT.

Lest you think this is a piece on FED lingo we actually do have a market observation to share through all of this. That is, market participants, with incoming tightening financial conditions in mind, have begun to wring speculation out of the market landscape.

We shared this observation in latter 2021 as we noted, in our view, the greatest concern from collective market participants was the FED’s shift to being more aggressive toward tightening financial conditions and to a lesser extent, the most recent variant of Covid.

It was the massive money printing program approaching two years in length (by the time it reaches its conclusion) coupled with their zero interest rate program that had pumped market valuations to the sky and with this the removal of such would have some level of impact on the landscape.

Click For Larger View:  https://schrts.co/apiphyAk

Above are three areas of the stock market that have evolved into sharing a bond under the speculation umbrella.  Speaking to their shared characteristic we can see these unrelated areas have traded on a trend basis together – in particular since the beginning of November just as the FED began to offer suggestions they may have to speed up their tightening operations.

The three are Cannabis stocks, Green Energy stocks and Bitcoin.  The long yellow highlight emphasizes the notable downdraft as we rounded out 2021.  The shorter yellow highlights emphasize the continued downdrafts thus far in early 2022.  These represent tremendous downtrends for such a short period of time hence the wringing out of speculative fervor by collective participants.

Click For Larger View:  https://schrts.co/WtEepUpv

In addition to the three areas shared above market participants have been broadening out their concerns as reflected by notable downside price action for two large areas of the stock market as a whole:  Small sized companies and also what is known as micro sized companies.  These capture companies collectively by size irrespective of their industries.

Just as in our first chart, our second chart includes a long yellow line to emphasize the downside price action since the beginning of November while the short yellow line emphasizes their downside price action thus far in early 2022.

In addition to all of the above, last week after the release of the aforementioned FOMC Minutes more areas of the stock market began to take on stress. Interest rate sensitive areas, consumer discretionary and even technology stocks to name a few additional broad areas took on downside price action. These areas tend to do much better when financial conditions are being loosened by the FED not tightened.

At this stage market participants have all eyes on price inflation and the FED and what will be coming next. Importantly, we will be seeing releases of various monthly price inflation data as this week unfolds.

The stand-out question heading into these is if we continue to see headline grabbing multi-decade high readings how will the market react and simultaneously will the FED acknowledge it further by any additional suggestions of even quicker tightening?

Inside the market landscape it has been getting bumpy and thus far here in early 2022 it continues to do so. This week’s price inflation data will be an important piece of the on-going story and with this can bring with it more stress inside the stock market as a whole.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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