Part II of 2022 Outlook

I know I have promised a 2022 outlook for the markets, however as I look at forecast price levels, I see such a wide range of values that I think at this point, forecast values are not important. What is important is perspective and for that, three points stand out.

  1. Stock market outlook is overall negative, there is a small chance of a bounce if the Fed gets cold feet on tightening, but the direction is lower for both stocks and bonds.
  2. Inflation will get worse. A combination of supply factors including climate change ramifications are at the root. Long positions in gold and CRB commodity indexes will be a way to cope.
  3. Tech is losing its luster and its importance to the economy will lessen. The peak is behind us as the long road to local community moves to the forefront in the economy.

The Big Question is How does all this unfold in 2022.

  1. There is no question that markets are overvalued.
  2. One big thing stands out, how does the FED react when things get tough for the stock market and maybe even the economy. Chairman Powell has over and over been on the side of a hot market and hot economy and seems to be very taken with his reputation. He doesn’t want a major Crash while he is in charge, even now he is still buying bonds while he says that he will have to be selling bonds soon. Why not stop buying now?
  3. If the Fed does blink, many analysts believe the markets and the economy will melt-up quickly before the excess speculation blows itself out and the FED finally has to get serious. This is something to be on the alert for in the next 6 months.
  4. Regardless of all the talk of getting the economy back to normal, the fact is, there is a lot of fragility just below the surface. Just drive around your home area, things are tough for a lot of retail people.
  5. Inflation, both embedded and raw material driven will one of the key areas to watch.
  6. Global debt at 300 trillion dollars and the China real estate debt situation are still overhanging the world economy.
  7. On the other hand, there could be some positive factors, we may actually see Covid brought under control, my gauge is when the 14-day average for deaths drops below 100. This will help consumer confidence.
  8. One late point, added after President Bidens press conference today, January 19, 2022. Biden made it clear, from his standpoint he views the inflation problem that the economy is getting, to be Powell’s problem to fix, so that kind of gives Powell an excuse to be aggressive on the issue. Going further on this point, recently the market has been pushing up short term rates, the 2 and 5-year bonds, which are affected by FED Fund rate increases and letting the 10 and especially 30-year rates to drag along. If Powell is going to get serious on inflation the move will be to sell some of the FED bond inventory, this will really raise the 10 and 30-year rates. The stock market will not take this well.

Bottomline, in 2022, investors will have too actively manage their investments. There are so many directions that could unfold and differences between approaches will probably be greater than 50 percent.

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