Covid Omicron In Rear View Mirror: Will We Be So Lucky With Fed Policy?

Summary

• “Think the Fed’s already tightening? Not so fast.” (Barron’s).
• As Omicron fades into the dust as a market disrupter, inflation and interest rates will return as the the preeminent negative market obsessions. This should not be a deal breaker for the market.
• Thoughts on 2021 and 2022.

Nuthawut Somsuk/iStock via Getty Images

“Think the Federal Reserve is already tightening? Not so fast”

My sub-heading above is the title of an article published in Barron’s Up and Down Wall Street column last weekend. You will need a WSJ or Barron’s subscription to view it. I will try to summarize.

The author is Randall Forsyth. You who are regulars at Kort Sessions will recognize the name as someone who I have raked over the coals in the past for his unwarranted negativity and who never has a good thing to say about one of the greatest bull markets in history. This goes back almost nine years. While the early sections of this week’s article look to be a departure from the norm, he does not vary from his normal routine. It is bad news for investors.t

Reversing QE in 2022; The market's next big worry

Forsyth posits it is way too early for people to be saying that the Fed has already begun the tightening process. Tapering QE is not tightening.

Second, the widely anticipated lift off in its short-term interest rates policy will be far from a tight monetary policy.

Then he lowers the hammer with cautionary comments about the reversal of Quantitative Easing (the next big obsession), pulling liquidity out of the system (reducing the Fed balance sheet, selling bonds and CMOs). This is something he will worry us about ad infinitum in 2022. Then he backs up the hearse:

More provocatively, Waller (Christopher J. Waller, a new Fed governor with great policy chops) said the process of reducing the size of its balance sheet (that is, draining the metaphorical monetary tub) could start next year, which is a lot sooner than most Fed watchers and market participants assume.

“I don’t see any reason to delay balance sheet adjustment,” he said. “I think we can go much sooner and much faster” than the Fed did in 2014, he added, as our colleagues at MarketWatch reported.

According to one of Forsyth’s sources, this time table would be a big surprise. He did not say “negative surprise”, but you can bet he thinks that it could tank the market.

I have two questions for Mr. Forsyth and all the bears who would seize on these comments as precursors of bad things happening: why is the fed balance sheet so over-the-top bloated? My answer is because we were dealing with the financial crisis and Covid emergencies. My second question is where’s the emergency?

My take is that there is so much liquidity in the system, it will take a long time before shrinking the balance sheet will be a material problem. Lots of good copy will be wasted on it. Bad news sells. In the final analysis, shrinking the balance sheet is overdue, necessary and to be expected. It is not a reason to sell stocks.

A look back at 2021 and forward to 2022

This is how I closed my last post of 2020 – The market floats in a sea of mines:

Regarding the goose that lays those golden eggs (the stock market), my view is that with all the stimulus and zero interest rates the secular bull market continues but with a continued rotation away from the HAVES (BigTech) into the great mass of HAVE-NOTS (cyclicals, value and small cap). I embrace that change going into what could be a very fun year. (kortsessions.com, 12/29/20)

2022 looks like a continuation of 2021. Rates will be heading north on the back of higher inflation and a return to a non-emergency stance on the part of the Fed. This will be a head wind for higher multiple stocks. The continued effects of the stimulus programs recirculating through the economy, tight labor markets (significantly higher wages for our lowest paid workers who will spend every dime – “More than half of US states to hike minimum wage in 2022, but employers moving faster” CNBC 12/29/21) – and supply chains untangling should augur well for a strong 2022. Cyclicals, value and small cap should continue to lead the parade.

As is always the case, your thought and comments are very much appreciated.

Thank you so much for your attention and readership. I want to wish you and yours a very healthy, prosperous and happy new year!

Original Post

Comments

[mysonchino]

Thanks Bill, I always enjoy your realistic common sense articles. I especially liked the title of this one. I my opinion this is the last hurrah for COVID. People are tired of it, "experts" have lost credibility (rightly and wrongly) logic is starting to prevail and Washington has to spin a more positive "immediate" narrative if they want to stay in power. This is already happening. I see a positive article or two every day re COVID. One day soon, within 2 or 3 months or so the dam will burst and it will be declared over.

The stock market already senses this but si many are skeptical that it bodes well for the market. Take big tech out of the indexes and we are not nearly as overvalued as many headlines scream.

I look for a year with total return in the 10-12% range. I just calculated my 2021 return and it was the best ever on a % basis. (37.11%). If I get 1/3 of that in 2022 I will be estatic. 60/40 chance. But a correction could also occur.

I'm a long term investor and realize the excess returns I make one decade will be off set in the next. As long as I attempt to live a couple more decades it doesn't matter what happens year by year. But it's always fun to have a great year like this one.

Have a great new your and keep writing. Mush enjoyed.

[Bill Kort]

@mysonchino thank you so much for your kind comments. I think you are spot on with regards to Covid fatigue. Regardless of when the virus makes its final exit as a lethal obsession, its days as a market killer are over. Meanwhile, I will continue to write. Putting it down in print really helps me in my own thinking.

Bk

[bluescorpion0]

the Fed and the economy is a delusion. as long as you are aware there is no solid foundation to this illusion all will be fine

[Bill Kort]

@scorpion.north thanks for checking in. These guys have got me hook, line and sinker. I have been completely fooled by the illusion/delusion since I started posting back in 2013. They are amazing.

Bk

[cemanuel]

Thank you for the article. I don't see much reason for doom and gloom myself. The economy is expanding and while inflation will be with us for a bit, a lot of it is "good" inflation due to wage growth. When lower earners earn more, it generally goes right back into the economy.

I think flat to 10% up for 2022 is likely and we may finally get a 10% correction which would be nice, just to remind folks that it can still happen. Earnings should continue to improve though and so long as this happens I just see no reason for any kind of sustained drop. I would like to see valuations come more in line with historical levels.

I'll also be interested in this: A CNBC poll published in August wrote, "A quarter (26%) of the general public began investing in 2020 and later (73% of investors began investing before 2019)." www.surveymonkey.com/...

If/when the market gets a little twitchy or has a pullback; will these folks stay in or decide they had a nice run and pull money out? Hopefully they are looking at things for the long-term.

This response: "New investors began investing to plan for the future (35%), because friends and family encouraged them to (19%), they recently learned how to (16%), due to extra money from the pandemic (10%), and the growth of cryptocurrency (10%).." implies that 35% are thinking long-term. The other 65%? We shall see.

Have to say the 10% crypto is a bit troubling - fine for folks with experience but I'm not sure it's the first place people should go to invest.

[Bill Kort]

@cemanuel thanks for your comment. I think a correction would certainly be positive. It would certainly be normal. Finally, it might shake out weak holders. I’m not certain about how much that moneychimp survey means as it does not cover the many general public investors who have held stocks for years. I would agree though there are enough newbies, weak hand, investors in the market today to provide us with a significant drawdown. Areas that might be particularly vulnerable would be a lot of the innovators stocks with no earnings and meme stocks like GME. As I pointed out in the article, I really do believe there are a lot of really interesting names in small cap, mid cap growth/value. Essentially I see the bifurcated market of the last few years going the other way with all of the have Nots performing very well.

Bk

[cemanuel]

@Bill Kort I should have mentioned the obvious that this 26% will represent a pretty small proportion of money in the markets. There may be the odd person here or there who put 7 figures in but 4-5 is likely the norm. I don't think what they'll do will move the market all that much. I'm just hoping they don't get scared off by some volatility.

[Bill Kort]

@cemanuel thanks for the clarification. My sense is that the newbies will be scared off. They will either learn from their experience and come back poorer but wiser or they will shun the market until the peak of the next great secular bull where they will make the top.

[hititdownthemiddle]

@Bill Kort Thanks for a good article. I suppose the answer to how the markets react to possibly reducing the balance sheet depends a lot on the time horizon and how it's shaped by the media. In the short term (1 yr is short term to me), the markets are apt to not like it and sell off. I'm not sure I believe the fed will actually do it though, so I'm sticking to a more fundamental approach to pick stocks.

[Bill Kort]

@hititdownthemiddle agreed the markets might not like the Fed’s time table. If past history is prologue the reverse of QE will be more moderate than Mr. Waller would like. Regardless of the path that they take when the dreaded taper starts there should be a fire storm of negative media. I would use that as a buying opportunity

[TradeBot]

Always appreciate your perspective Bill. Hope your 2022 is full of purpose and contentment.

[Bill Kort]

@TradeBot thank you ... what a great New Year’s sentiment!

Bk