I do believe were having a market correction and not a bear market on the averages. It feels like a normal correction and we don’t have the ingredients in place for a full-fledged bear market. However, it is painful to go through even normal corrections. We have broken some key technical levels and the downward pressure may last for a few more sessions. I’m watching some support for the S&P 500 a couple of percentage points below are we are now. That would make it a 10% correction.
Omicron wave is having an impact on the US economy. However, the market is reacting to the anticipated Fed moves. The market was absorbing the news of the Fed tapering their bond purchases and the possibility of rate hikes in 2022. We then got hit with the minutes from the Federal Reserve and the news that the Fed discussed actually selling some of the assets on the balance sheet at the Federal Reserve.
So, how much of the inflationary pressure is due to growth of the economy? My belief is not much. So how much could the Federal Reserve do by raising rates. My belief is not much. Energy prices have been soaring due to structural issues. Labor has been impacted by the virus and this is impacting supply of products which is increasing cost. There is a labor shortage out there and much of this is due to the virus.
Some of these inflationary pressures will ease as we go into the year as the omicron virus wave starts to ease. Energy costs are going to stay high as long as there is restrictions on exploration and production.
However, still the cure for high commodity prices is high commodity prices. With oil and gas costs as high as they are, producers will find a way to produce. Even with the commitment towards renewable energy, energy companies will find a way to supply our infrastructure with oil and gas. However, it will take a while for supply to meet demand. And in the meantime, expect higher energy prices and this will impact inflation.
As I said in the past, bull markets don’t die of old age they are killed by the Federal Reserve. Hopefully, the Federal Reserve respects the fact that much of this inflation is structural and not do to an overheated economy. We need to get workers back to work and commodity prices to normalize. I’m still expecting a positive year for the stock market. Bond yields will probably continue to move higher and this will put pressure on bond prices. Higher yields could put pressure on both commercial and residential real estate.
I’ll keep you posted on what I’m thinking.
The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.