Our Views

SPECIAL: Zooming Out, 2022 was a year of “roundtrips.” Fed remains principal “risk” to markets, but we see reaction function changing as inflation continues to fall.

2022 has been a year of “shocks” and “sudden changes.”

  • Stubbornly high Inflation was an unexpected “shock” in 2022 that weighed on equity performance, but recent trends show it is falling just as quickly as it rose
  • Persistently elevated geopolitical tensions from conflict between Russia and Ukraine created supply imbalance “price shock” for crucial input commodities. Prices have roundtripped since.
  • Fed went from “hands-off” to “all hands on deck” as inflation climbed through 1H2022, but “reaction function” set to change as recent trend proved inflation is falling faster than most believe
  • China went from perma zero-Covid to reopening overnight (whoa), underscoring how fast apparent crises can change
  • Headlines below prove just how sudden this actually was  

Source: China News and Kyodo News

 

But as Tom has said, “crisis” also comes with “opportunities.” Throughout 2022, we have seen many improvements.

  • Supply chains substantially eased
  • COVID-19 faded in the United States 
  • Several key raw material inputs fell sharply from post-war highs: Gasoline, Oil, Wheat, etc.
Read the Latest SPECIAL
  • Stocks limped to the finish line in 2022, disappointing the many bulls who had hoped for a Christmas miracle. From my perspective, my indicators have remained unfavorable, and I was not expecting much during the year-end dash.
  • More strategic investors (time horizons of more than 1- to 3-months) should be aware that higher-quality cyclicals are among the RISKIEST names right now as their earnings revisions are nearing optimistic extremes and likely to have negative rollovers, which historically leads to poor performance.  For tactical investors, such names might hold up relatively better in the short term but stay on full alert for downside reversals. 
  • Looking forward, the coming year will likely see an important equity bottom and a high-quality buying opportunity.  The open issue is when to start repositioning for it.  This is likely to be an ongoing heated debate during 1H23.
  • Regardless of what strategies or tactics an investor uses to seek relative performance gains, my research is still advising caution, selling countertrend rallies, repositioning, raising hedges, and building shorts as there is still a considerable amount of absolute risk.
Read the Latest Brian's Dunks
  • The reduction in volatility relative to equities has historically pre-dated substantial near and intermediate-term moves. Forward 365-day returns have been impressive, while near-term actions have been mixed.
  • Looking towards next year, a peaking USD should be constructive for bitcoin and other cryptoassets.
  • Investors might not be compensated for the risk incurred in the immediate term (< 1 month). Current levels offer favorable entry points for those with a longer-term investment horizon for both  BTC and  ETH (12+ months).
Read the Latest Crypto Strategy
  • As 2022 ends, the political world looks to January 3rd and the opening of the new Congress.  After two years of Democratic rule where the President’s party controlled both the House and the Senate, in 2023 Republicans will take control of the House, although it is a paper-thin majority.
  • The first order of business on Wednesday will be the election of the House Speaker.
  • The House can’t start its business until a Speaker is approved. Wednesday could be an intriguing day in US House history.
Read the Latest US Policy

Wall Street Debrief — Weekly Roundup

Key Takeaways

  • The dismal year for markets ended Friday: The S&P closed 2022 at 3,839.50, down 19% this year. The Nasdaq lost 33%.
  • Stocks posted their first negative year since 2018, the worst year since 2008, and only the third negative year since 2003.
  • Risk assets cratered amid the Federal Reserve’s fight against inflation, with Bitcoin and Ethereum down nearly 70%.

Phew. Stocks ended a tough year in a dismal fashion. Just as they kicked off the year in January with a slide, markets sold off into the holiday week. In December, the S&P 500 fell more than 6%. During the long bull run since the March 2009 bottom, the S&P rose more than 600 percent. 

The S&P 500’s energy sector closed out the year up 59%, making it the only group within the index that didn’t post a loss. That’s the first time that only one sector within the S&P 500 has risen, according to data going back to 1990. 

Everything changed this year when policymakers at the Federal Reserve accelerated how fast they raised interest rates. There were several sharp bear-market rallies, but the January selloff set the stage for the entire year. 

The Fed’s efforts to tame the worst inflation in 40 years appear be working: Price increases have been slowing. Here, we believe inflation has peaked and will continue to fall, especially if the Fed continues to aggressively raise rates in 2023. What we have witnessed over the past 36 months triggered a generational shift in markets, starting with the pandemic that shocked global markets and propelled policymakers to induce generous stimulus. The inflation, once a non-issue for many younger Americans, rocked the U.S. – and the world. 

This sequence of events drove the Fed to start tightening, starting in March, at a rate faster than at any time in a generation. By raising rates, borrowing costs have increased, slowing demand and tempering further price increases. The yield on 10-year U.S. government bonds has soared 2.3 percentage points this year, its biggest annual rise on record for data going back to 1962. Thus, borrowing rates on mortgages, company bonds, and other debt rose sharply. 

Tech companies were hit especially hard. Because growth had previously been supported by low-interest rates, higher costs in 2022 meant lower profits. The price of Bitcoin fell nearly 70%, in line with Tesla’s disastrous 2022. Its shares fell 70%, its worst performance since the company went public in 2010, and only the second year the stock has declined in value. Tesla has been on Tom Lee’s Granny Shots list for a while, though, and it’s still up nearly 500% over the last five years (and nearly 10,000% since its IPO 12 years ago). 

As we enter 2023, the uncertainty lies around how much further the Fed will go. Amid signs of inflation cooling, Tom Lee sees a greater likelihood that the central bank will pause further rate increases soon, so that it may allow the effects of the current high-interest rates to seep into the economy. Others aren’t so sure, citing still well-above-normal inflation that continues to dig into Americans’ wallets. Regardless of what happens next year, our goal is to continue to inform and educate you to be a better investor and decision-maker. 

Here are a few charts that tell the story of 2022:

It was the year of inflation and the Fed, though the Fed’s aggressive rate hikes appears to be causing a sharp decline in CPI.

Zooming out from the last few years, CPI and central bank policy rates are still nowehere near where they were 40 years ago.

2022 was the year of energy, and then everything else. Oil and gas companies posted record profit this year despite ESG-related concerns:

Elsewhere

The fears of independent public-health experts appear to have come to pass in China, as the country’s abrupt exit from Xi Jinping’s zero-COVID restrictions caused a nationwide surge in COVID infections and deaths. Chinese authorities have stopped releasing detailed official COVID statistics, insisting that the number of infections is “relatively low” and reporting COVID death rates that are statistically implausible. Independent epidemiologists estimate as many as 1 million new infections and 5,000 deaths a day before the travel-intensive Chinese New Year holiday coming up in a few weeks.

And finally: It might have been a tough year for investors, but 2022 was a good year for Santa. According to statistics from The New York Times, wages for Santa impersonators rose 12% YoY this holiday season.

Source: The New York Times

Ho ho ho, indeed. Happy Holidays everyone. May you and your family find peace and prosperity in 2023 and beyond.

By the way, we’d like your feedback. How are you enjoying this weekly roundup? We read everything our members send and make every effort to write back. Please email thoughts and suggestions to inquiry@fsinsight.com.

FS Insight Media

Upcoming
Replays

Stock List Performance

Strategy YTD YTD vs S&P 500 Inception vs S&P 500
Granny Shots
+13.09%
+3.05%
+111.51%
View
Sector Allocation
+11.75%
-4.16%
+0.90%
View
Brian’s Dunks
Performance available here.
Disclosures (show)

Stay up to date with the latest articles and business updates. Subscribe to our newsletter

Articles Read 1/2

🎁 Unlock 1 extra article by joining our Community!

Stay up to date with the latest articles. You’ll even get special recommendations weekly.

Already have an account? Sign In

Want to receive Regular Market Updates to your Inbox?

I am your default error :)