January 7, 2022



                                         Week Ended January 7th, 2022

• Stocks sold off this past week with the tech-heavy NASDAQ taking the biggest hit, as a result of rising yields on treasury securities as well as hawkish minutes from the most recent Fed meeting in December.  The Fed seems to have painted itself into a corner as consumer demand snapped back strongly off COVID lows.  However, supply constraints remain (production, logistics, labor) causing almost textbook inflation where demand outstrips supply.  At this point we expect a choppy market as the Fed tapers and then begins to raise interest rates.  Although this will unsettle the financial markets, if done at an appropriate pace, will ultimately bring back into balance the supply/demand equation and lead to sustainable economic growth.

• Prior to the release of the minutes from the December meeting of the Federal Reserve’s Open Market Committee (FOMC), the body that determines the direction of interest rates, most thought the Fed would taper (reduce the purchase of treasury and mortgage-backed securities) for a few months prior to raising interest rates.  However, given the recent data on inflation in conjunction with the minutes, many believe, as do we, that the Fed is more likely to move sooner rather than later on both.

This coming week, investors will get a look at December inflation at both the retail as well as wholesale levels.  On Wednesday there is the release of the Consumer (retail) Price Index and on Thursday, the Producer (wholesale) Price Index.  Analysts expect both to rise by 0.40%.

The Fed must tread carefully to not tighten too quickly so as to spook investors or not be perceived to be behind the curve either, all the while dealing with the various COVID related variants that may impact the balance between demand and supply.  Not an easy task.

Patience is paramount during times of market transition.  Let’s see how this plays out a bit.  Keep your eye on the long-term objective.  Don’t be swayed by short-term volatility.

• Earlier this week, the market capitalization of Apple Computer (AAPL) briefly exceeded the $3 trillion market before selling off to a market cap of $2.825 trillion.  The rise in the share price of Apple has been a result of rising earnings, their ability to generate free cash flow and share buybacks.  Apple, like many tech companies may face choppy trading over the next several months.  However, these tailwinds noted above along with a convincing secular growth story should help put a floor under shares as well as set it up for stronger trading during the second half of 2022 and into 2023.  This can also be said for other tech stalwarts, namely Microsoft (MSFT), Alphabet (GOOGL) and NVidia (NVDA).

• There were several key statements from the text of the Fed minutes, to include:

o “Almost all participants agreed that it would likely be appropriate to initiate balance sheet runoff at some point after the first increase in the target range for the federal funds rate.”

o “Many participants judged that the appropriate pace of balance sheet runoff would likely be faster than than it was during the previous normalization episode.”

o “Participants remarked that inflation readings had been higher and were more persistent than previously anticipated.”

• Two key inflation gauges are at the center of this week’s economic releases, which include.  On Monday, Wholesale Inventories; on Wednesday a reading of inflation on the retail level as measured by the Consumer Price Index (CPI); on Thursday, Initial Claims for Unemployment Benefits and the Producer Price Index (PPI), a measure of wholesale inflation; and on Friday, December Retail Sales, Industrial Production, Capacity Utilization and November Business Inventories..

• The corporate earnings season is upon us and will begin to ramp up this coming week.  Some potentially market moving companies reporting include – Five Below (FIVE), Commercial Metals (CMC), Albertsons Companies (ACI), KB Home (KBH), Delta Airlines (DAL), Taiwan Semiconductor (TSM), JP Morgan Chase (JPM), Wells Fargo & Company (WFC), Blackrock (BLK) and Citigroup (C).


o Investing is about staying within your asset allocation model as the short-term is IMPOSSIBLE to predict whereas the direction of the equity markets over the long haul is VERY PREDICTABLE.  Successful investing requires the ability to harness your inclination to respond by selling during times of market stress.

o Stock prices do not move in a linear fashion.  If they did they would provide returns similar to that of your bank account rather than their historic annualized 8%-10%.  Short-term moves in both directions are unpredictable.  Did you really think that after a 60% move off the bottom in March, there wouldn’t be a correction?

o We love the statement within an article written by Mike Santoli for CNBC who observes that it is “always worth recalling Peter Lynch’s line that more money is forgone by people anticipating corrections than is lost in corrections themselves.”

o From the perspective of the client it is nearly as uncomfortable and for them even “irrational” to sell or rebalance during a bull market as it is to buy during a bear market.

o It is important to keep in mind that there is quite often a disconnect between current economic activity and the stock market as the latter is a mechanism that discounts economic growth up to twelve months in advance.

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