Insights & Advice


Beware the hikes of March

There is a more than an even chance that the Federal Reserve Bank hikes interest rates at least 25 basis points by the end of March 2022. Several analysts expect another three hikes by the end of the year. As an equity investor, this should concern you.

This week, both the Consumer Price Index (CPI), and the Producer Price Index (PPI) came in as expected. But “expected” does not mean anything like good on the inflation front. On a year-over-year basis, CPI was up 7%, while PPI hit 9.7% for all of 2021.

And while economists debate whether inflation and economic growth will subside over the course of this year, the Omicron variant is throwing a big kink into those forecasts.

In my January 13, 2022, column, “No-shows threaten economy,” I pointed out that millions of workers in the global labor force have been forced to stay off the job while recovering from this highly contagious variant. It has also created additional delays in the supply chain. Container and cargo congestion is building among the world’s 20 largest ports.

Since much of the inflation rise has been caused by supply chain problems, the short-term impact of more delays indicates, to me, a higher rate of inflation going forward. As such, the Fed seems honor-bound to raise rates faster (and maybe at 50 basis points, instead of the expected 25) in order to deliver on their promise to contain inflation.

But the bond vigilantes over in the fixed income markets have already taken matters into their own hands. They have bid up the U.S. Ten-Year bond yield to 1.72%. At one point this week, it climbed to above 1.8%. Most bond traders are now expecting yields to rise to 2% throughout the next few months.

As such, foreign investors, who usually line up to buy U.S. Treasury bonds in the government’s frequent auctions, have not been as eager to do so. This week’s ten- and thirty- year auctions were meh at best. None of this has been good for the stock market.

If you have been reading my columns, you know that technology companies do not do well in an environment of rising interest rates. The high-flyers, that is stocks with little or no earnings but huge price gains, have been bearing the brunt of the downward pressure.  But even the big guys are feeling the pressure at this point with the NASDAQ 100 down 10% from its highs.

Every time these market favorites try to get up off the floor, they are pounded down again. Investors, trained to “buy the dip,” are getting their fingers chopped off. In fact, underneath most indexes, everything that qualifies as speculative, whether it’s crypto, electric vehicles, marijuana stocks, Fintech, etc., have been all been taken to the woodshed.

Those readers who have followed my advice have hopefully avoided much of the carnage. If you haven’t acted to reduce the leverage in your portfolios, there is still time. I am expecting that we will see an oversold bounce in the stock market starting on Tuesday next week. Why?

Earnings season is now upon us. Most investors eagerly anticipate the “FANG” companies’ results and usually buy stocks in anticipation of that event. Since they are such a large weighting in the overall market, great FANG earnings usually buoy the entire market. As such, I would expect the same thing will happen again.

The fly in that ointment is that while earnings may be stellar, guidance won’t be. Between the Omicron variant, supply chain issues, inflation, and the Fed’s tightening stance on interest rates, the near-term future that FANG executives see, I’m guessing, may not be as rosy as many investors expect.

If I am right, and the markets do bounce, take that opportunity to reduce exposure to the overall market. I am still looking for a serious correction in the weeks ahead. If the correction is steep enough, chances are that the Fed might back off on further tightening, but at this point, that is just a supposition based on past Fed behavior. In any case, we’ll cross that bridge when we come to it.

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