When Seeking Alpha reached out to me in late 2021 to see if I would be interested in writing an article about my outlook for 2022, I appreciated this opportunity to participate in their virtual round table. I hesitated for quite some time before slapping the picture of a bear on my article titled “Positions For 2022: A Changing Of The Guard” but I felt strongly enough about the challenges we were likely to face in 2022 that I decided to go ahead with it. I wrote the following in that article,
We are coming off two amazing stimulus fueled years where the S&P 500 and Nasdaq generated gains of 46% and 74%, respectively (at the time of writing) since the start of 2020. This is despite a recent pullback in growth stocks. Looking in from the outside and through the lens of a market participant in early 2020, this kind of performance during a global pandemic with multiple waves of infection is beyond comprehension. In other words, markets for the most part remain unpredictable. There’s one rule however that has managed to withstand the test of time and that is: “Don’t fight the Fed.” When the Fed decides to open or close the flood gates, it is better to go with the flow instead of fighting the strong current.
With both the government and market participants agreeing that inflation is not transitory, we’re likely to see Fed tightening and this could result in a “don’t fight the Fed” scenario, but in reverse.
The key driver of the stock market is likely to be Fed action and sector/style rotation as a result of anticipated higher interest rates.
The first interest rate hike last month was a modest 25 basis points but Jerome Powell indicated that a 50 basis point hike will be on the table in May. Market participants are now expecting at least two 50 basis point hikes and potentially a 75 basis point hike. A 75 basis point hike would be highly unusual and would signal that inflation is proving very challenging to control. In this environment, it is not surprising that the S&P 500 dropped nearly 3% last week and the Nasdaq pulled back 3.69%. While we might see some respite from selling in the coming days, the risk continues to remain on the downside for equities in general with a few pockets of opportunity.