It is not about the $NASDAQ(.IXIC)$ and $S&P 500(.SPX)$ falling 3.34% and 1.94% respectively on Wednesday. It is about the concoction of 3 market risks - Persistently high inflation, Omicron spread, Fed tightening policy sooner than anticipated; all 3 coming together. As you can guess, the consequences of those risks to the market may suggest more equities selling ahead.
I was initially bullish for the new year 2022 but I am now doubting my view since the Fed suggested in the most recent meeting minutes that the tapering pace would be sped up, rates may be raised sooner and faster along with consideration to reduce the size of their balance sheet. All these measures indicated that easy policy accommodation is coming to an end, soon and fast. Perhaps the most least expected and worrisome policy tightening to the market is balance sheet reduction as liquidity is taken out instead of being injected. It is therefore very likely that stock prices especially high flying tech stocks and stocks with rich valuations will be further re-priced lower.
Markets could also be underpricing the impact of the spread of Omicron. The significant spread has the potential to slow down economic activity and growth due to reduced workforce from workers contracting the virus and not being able to return to work. Intuitively, productivity will be reduced, goods and supplies to the market will also be reduced, resulting in the imbalance of supply and strong demand, thus further driving up the already high inflation.
So when we combine a potentially slower growth environment with tightening economic policy along with unabating inflation, we get 7 letters directed to the stock market. The letters are: T R O U B L E.
As always, looking forward to hear thoughts from fellow Tiger friends, please share below.
Till next time. [Claw]
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What do you guys think of this 🤔