The Market’s Battle Within
As of last month, the S&P 500 Index officially hit correction territory, experiencing the largest drop since Spring 2020. In many ways this market correction has defoamed some froth in the markets, with high growth stocks hit the hardest but in the aftermath leaving the markets as a whole, much healthier from a pure valuation standpoint. Highlighting that point is, while Consumer Sentiment is hitting decade long lows, US Retail Sales just hit a new high in January 2022.
Much of the market movement we are feeling today is more about Inflation rather than the crosswinds of Russia/Ukraine, Politics and COVID. More and more investors are concluding that the Fed needs to move faster on combating inflation, which has increased the number of rate hikes that are expected this year. Reading the ticker tape gives us even more conviction that these rate hikes are going to become a reality.
So how many rate hikes are now baked into the markets? Back in the 2013 “Taper Tantrum”, it was the “Taper Talk” not the actual Taper itself that caused the most movement in rates. Opposite to intuition, the 10-year Treasury Rate fell once the pre-planned rate hikes began to be executed in 2013. We are in the “Taper Talk” phase now and anticipate the actual Taper itself to possibly start at the upcoming Fed Meeting on March 15th. At this point, we see 4 rate hikes as highly probable and even as many as 7 rate hikes by the end of 2022.
While the stock market having a “sale” never feels as fun as it sounds, it’s a great reminder to fight against our innate human psychological biases like the Herd Mentality and Recency Bias. We know that fear plays a role, but how rational is that fear when every market decline in history has been followed by subsequent record highs.
*Learn my market thoughts on the evolving situation in Russia in this Detroit Free Press article: https://sghwm.com/wall-street-woes-russia-invades/