February 2-Minute Market Drill

Happy February everyone! This is the month of love…Valentine’s Day!!

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Okay, time now for the 2-Minute Drill….

Continuing our theme of love…the markets haven’t shown much love to investors so far in 2022.

Continuing our theme of love…the markets haven’t shown much love to investors so far in 2022.

(source: koyfin)

No, no, no. We got out of the gate with a wild selloff in the equities markets. All of the major averages were down. High-multiple shares and small cap companies (Russell 2000) took it on the chin the most.

Let’s talk about the why we think this is happening…and let’s do so with a often-cited quote from the Great One.

Let’s talk about the why we think this is happening…and let’s do so with a often-cited quote from the Great One.

I love quotes that are used so often, they can become total yawners. But, when they seem to fit the situation, yes, let’s go with it. So, here I go, giving you a yawner that we believe sizes up what’s happening right now in the markets.

It comes from the The Great One, Wayne Gretzky, who once made this comment about how to stay a step ahead of the action.

He said, “Skate to where the puck is going, not where it has been.”

He said, “Skate to where the puck is going, not where it has been.

Looking ahead–that describes perfectly the action we see in the markets—and not even just today’s markets. Let’s take the current situation. The prevailing narrative over the last year has been concerns over inflation. And, that has since morphed into worries over Fed tightening—both rate hikes and balance sheet runoff (reduction). Both moves are intended to cool down the economy. And, the trick here is to slow the economy down enough to stabilize prices without throwing us into a recession with massive layoffs.

No decisions from the Fed have been cast in stone yet, but we believe investors are busy skating to where they think the interest rate puck is headed (hint: higher). And, that’s caused a repricing of many assets. If interest rates are, indeed, headed higher, it means investors can find better income from less risky areas of the market. In turn, that puts pressure on the more volatile areas including stocks.

The way we see it, investors are basically shooting first and asking questions later. They’ll expect aggressive tightening until they get a sign that tells them otherwise.

The way we see it, investors are basically shooting first and asking questions later.

So, what are those signals investors should be watching? One could be the hard data. Analysts believe the Federal Reserve will raise the Fed Funds rate next month. But, investors will be looking to see if the initial move is the more routine 25 basis point hike or a 50-basis point one.

We’ll also need to watch the aforementioned inflation data. That’s the primary reason the Fed feels forced to tighten. Inflation really started picking up last spring so inflation growth will be coming up against some tougher comparisons in the coming months. The direction of that data will likely influence the direction of the Fed.

Lastly, look for the language of Fed officials, most notably the Fed Chair, Jerome Powell. His words are always parsed so finely. If his language around tightening starts to soften, it could signal support for the markets. If, if, if. Yes, that’s just it. Investors are always dealing in “ifs”.

Lastly, look for the language of Fed officials, most notably the Fed Chair, Jerome Powell.

Here’s one more: If you’re headed out to skate soon, remember the Great One and his inadvertent lesson on the ways of Wall St.

Have a great month everyone! Reach out if you need more clarity.

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results.