Suddenly Hawks Are Flying Everywhere
CAMS Weekly View from the Corner – Week ending 12/3/21
December 6, 2021
You may have noticed market turbulence of late and perhaps placed it all under the banner of the latest variant of Covid-19. In our view an immediate question arises with that conclusion: Is it accurate? Why would we even pose such a question that on the surface seems ludicrous? Do we not know the stock market went down the day the variant officially surfaced? Yes we are aware and yet we are also aware that markets across the board have been radiating stress signals in the previous month – well before any new variant issues were surfacing. Generally speaking various stress signals have been slowly but consistently building under the surface of the well known stock indexes. With each passing day in recent weeks it seemed we would have yet another discussion topic around X-stress signal build. To be fair, said build was not dramatic but was consistent and broadening. That process made it all-the-more curious/interesting. How many times did we blurt out – “Umm, what is going on?” As stated, surface levels seemed fine to the point of us questioning our sub-surface observations. Enter our week-ending deep market structure dive of three reports ago. We not only run structural stats on market structures but we also get a visual to aid the process in particular when market storylines are not adding up. Frankly, what we seen was startling. Simply, the stock market was falling apart quickly deep inside itself and yet, as stated, damage was negligible in the primary indexes (a.k.a. surface level) which suggested notable bifurcation in the stock market. In addition, sell disciplines started kicking us out of positions in our portfolios and cash started building again. Furthermore, buy candidates that were all but ready to go had evaporated out of nowhere for seemingly no reason. That part in particular had us very curious and added to the building stress signals. This left us asking – “Is something coming?” An honest question with no certain answer. Federal Reserve Doves Quickly Morph into Hawks A few editions back we shared the Doves and Hawks view relative to monetary policy approaches. Members of our Federal Reserve (and world monetary entities) are historically labeled according to how adamant they are (by their general views and policy decisions) in controlling inflation. A dove is one who is viewed as quite lax when it comes to inflation concerns/policy decisions while hawks represent a focus on controlling inflation via their policy decisions. With this, we have been a bit stunned with the level of hawks that have surfaced with the flip occurring nearly on a dime. Suddenly, hawks are everywhere. General Timeline Just over a month ago the Federal Reserve shared they would begin to gradually reduce the amount of money they are printing. They would print less – not stop – just print less while other monetary entities around the globe were reducing their money printing rapidly and in some cases putting an immediate stop to said printing. Follow-on days and into weeks (post-Fed meeting) we seen Federal Reserve Presidents (Presidents of various Fed District Banks) chirping more and more about the need to speed up tapering which means stop the money printing faster. Then the Administration reappointed Chairman Powell to another term and elevated Fed Governor Brainard to the Fed vice Chair position. Brainard is a noted dove and Powell had certainly become one. In both of their acceptance press releases they addressed handling inflation as their first topic within their releases. That was sending a message. (Doves becoming hawks?) First we had Fed Presidents followed by a reappointed Fed Chairman and a newly appointed Fed vice Chair sending hawkish tones? Continuing we seen further emphasis on price inflation emphasis with the International Monetary Fund (IMF) officially urging the Fed to step up the pace of ending their money printing policies. Adding emphasis to the newfound collective hawkish tones Chairman Powell chimed in more to the point suggesting speeding up tapering can take place and will be discussed. (In Fed-speak that is a sit up in your chair message.) Collective Market Participants All of the above timeline occurrences (with others not included) and clear new hawkish tones radiating from monetary authorities was clearly registered by market participants hence our aforementioned developing risk-o-meters beginning to chirp up. In a nutshell, the money spigots are looking to be turned off which importantly is a global storyline. The outrageously valued markets we have been experiencing have been feeding off of the money expansion spigots being wide open and now appear to be coming to a close. This is where market actions will become very interesting. Can they remain so elevated without money printing? If your kneejerk answer is yes – be careful with that. It will be a tall order to fill. Why Should We Care About Any of This? Identifying market storylines accurately is important if not crucial in order to operate within markets. Historically, it is not unusual at all for markets to take on a new tone (be it up or down) and hence a new direction (think trend) for a more structurally important reason than what may seem to be an obvious reason for what is actually causing collective market participants to change direction. The new Covid variant is certainly adding to market concerns but in our view we sense the real market story, i.e. that which has market participants lathered up and hitting sell buttons is the coming suspected disappearance of cheap and easy money policies both in the U.S. and abroad. That cheap money (printing press) has played a large part in the speculative fervor underlying markets over the last eighteen months Coming days and weeks will be interesting in how various risk measure act. We will share as they unfold. I wish you well…
Director, Market Research & Portfolio Analysis
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.
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