11.01.2022 – The week has not really started optimally for bulls. Fears of a tightening of the Federal Reserve continue to circulate. And also the US policy plays a role. Let’s let a bear provide a possible explanation to what’s happening.
Yield of the Treasuries rises
On Monday, the yield on 10-year U.S. Treasury bonds moved to a two-year high of 1.8064 percent. The S&P 500 dipped to the 50-day line, which was last at 4,677 points. Before the new Consumer Price Index on Wednesday, many investors held back for now. We had already suspected that the interest rate fears continue to hold the market in its grip. Not only we: Over the weekend, Eric Peters, chief investment officer at hedge fund One River Asset Management, delivered a gloomy outlook.
Fear of overreaction
Peters fears the Fed is overreacting – after all, the central bank spent a decade fighting deflation. Accordingly, he said, it lacks experience with inflation. “Financialization of the economy is so extreme that it doesn’t take many rate hikes to have a meaningful effect on the economic system anymore.” The hedge fund manager continued, “When you financialize your economy, and it is leveraged to your financial system as it is in the US, then you don’t need much tightening to slow the economy.”
Strong vola ahead
In this regard, the One River Asset Management expert does not trust the Fed to manage expectations in the market: “When your economy becomes a casino, players in the casino have outsized control over the economic system in that their forward expectations and bets start the tightening process before the actual rate hikes begin.”
All in all, the hedge fund expert sees black for this year: “This year will be messy, volatile, far sloppier than previous years. (…) First the market must adjust to the shift in the Fed’s stance, which will punish the most speculative corners of the financial system. (…) But that phase is well underway. The least profitable tech stocks excluding the FAANGs have been savaged. (…) This year, or at least this quarter, will be all about rotation, and beneath the averages there will be further carnage.”
Sector rotation
We think that such a sector rotation, in which only the strongest survive, is likely to take place above all in the high-tech indices. After all, the Nasdaq is home to many companies that are not yet making profits and are extremely sensitive to interest rate speculation. Apart from that, increased volatility will of course please traders. Unless they have gone long in e-currencies – Ether has lost more than 20 percent from its high in a few days. With higher interest rates, cryptos are just not needed as an inflation hedge anymore.
Looming political quake
For next year, Peters has even more fodder for the bears: “Then next year we will enter a political dynamic unlike anything we’ve seen in a 100yrs. (…) Now it is obvious that we are headed toward a catastrophic political collision. It’s so obvious but few people want to really admit it.” Note: If the Republicans take the majority in Congress in the November midterms, Sleepy Joe Biden is likely to face impeachment proceedings. Possible issues: venality by China; more Corona deaths than under Donald Trump; failure to withdraw troops from Afghanistan; incapacity due to senility; exploding violence in major cities governed by Dems due to “Defund the Police.” And with Congress having budget supremacy, America could be pretty much paralyzed politically next year. Our conclusion: we too think the two issues – Fed and Midterms – are two of the most important issues this year. Whether long or short – Bernstein Bank wishes you good luck!
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