"The journey of a thousand miles begins with one step."
- Lao Tzu
The 2022 stock market journey is off to an inauspicious start. If you are making good money to start the year, then good on you. If you are like a lot of the investors that we talk to and struggling to find your groove, just know you aren't alone.
Personally, I can admit that I've been confused and struggling a bit to kick off 2022. This isn't new of course, as this is often what happens in #Quad transitions (especially when the Fed pulls forward its plan to tighten rates).
The beauty of the stock market game though is that the journey begins anew every morning at 9:30am (if you work at Hedgeye much earlier). Every day you have the opportunity to change your positions and re-set your portfolios.
These decisions aren't always easy. Sometimes during economic shifts, you have to be more willing to take losses. And as humans, we aren't wired to take losses. In fact, some studies suggest the emotional pain from a losing position is 2x that of the positive emotion from a winning position. But if it clears your head, take that loss!
As Annie Duke, the author of "Thinking In Bets", wrote:
"When we think in advance about the chances of alternative outcomes and make a decision based on those chances, it doesn’t automatically make us wrong when things don’t work out. It just means that one event in a set of possible futures occurred."
Simplistically, this is the way to think about your positions and portfolio. With the new information you receive each day, has the probability changed that the position will go up or down? If it has and you need to implement the old stop loss then so be it. Remember "it doesn't automatically make you wrong".
Back to the Global Macro Grind…
If you've been watching The Macro Show or following us closely over the last week or so, the decision we are struggling with is whether we are in #Quad1 or #Quad4 this quarter. We will likely need more data to really confirm, although on inflation it seems increasingly clear we may have peaked or will be peaking. And on the market signaling side, Keith's #Quad4 (even if narrow) conviction is increasing.
This week in the U.S. we received December PPI and CPI. Both of these reports came in at absolutely high levels versus history. In fact, CPI was the highest level since 1982! Interestingly, the rate on the 10-year yield actually peaked 8 months or so before that in 1981, but I digress.
But back to those reports. CPI accelerated to a new high, while PPI decelerated to a lower Y/Y number than the prior month for the first time since April 2020. Furthermore, PPI actually had the lowest M/M increase in more than a year. So, the leading indicator PPI slowed. Not in a big way, but it slowed.
Globally, the evidence that inflation may be peaking is even more clear. Consider some of the key data we received this week so far:
- China December PPI came in at +10.3% Y/Y versus +12.9% in November;
- Russian December CPI decelerated to +8.39%, which was lower than November;
- South Korea Import Prices and Export Prices both decelerated versus November; and
- Argentina CPI decelerated to +50.9% from +51.2% in the prior month (although wow that's inflation!).
In fact, based on the CPI inflation we track globally for 47 countries, so far 12 countries have reported slowing CPI in December versus November. Conversely, in November all but 4 countries printed accelerating CPI. The full table is in The Chart of the Day.
The key risks to our call of slowing/peaking inflation in in the first half of 2022 is, of course, commodity prices and namely oil. WTI is back to a two-month high and making a legitimate run at a new 52-week high. If oil holds, it could keep inflation higher for longer... but even on this point as we roll into Q2 the year/year comparisons for oil get tougher.
Meanwhile, the Fed is set to start increasing interest rates just as inflation appears to be peaking or has peaked. If that doesn't make a lot of sense to you, you probably aren't alone. It could get ugly quick if the Fed overdoes their tightening (as they've been prone to do) especially if growth starts to slow. Perhaps this is what the QQQs (which are down almost 6% YTD) are telling us?
The other peak we've been watching closely is COVID cases in the U.S. As of yesterday's report of just over 800,000 cases in the U.S., cases remain up +29% in the last 7-days versus the prior 7-days. This is the lowest weekly change since Omicron took hold in the U.S. Based on the data, we continue to think cases peak this week or next. In a new study yesterday, the University of Washington actually said they think January 19 could be the peak.
We shall see if this holds, but Omicron declining sooner than many expect could well impact the growth side of our economic call in Q1. But as always, we will get up every morning, review the data, and begin our investing journey anew.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.53-1.81% (bullish)
UST 2yr Yield 0.74-0.98% (bullish)
SPX 4611-4801 (bullish)
NASDAQ 14,514-15,391 (bearish)
RUT 2106-2251 (bearish)
Tech (XLK) 161.05-175.36 (bearish)
Housing (ITB) 73.89-83.34 (bullish)
REITS (XLRE) 47.81-51.90 (bullish)
Consumer Staples (XLP) 76.48-77.92 (bullish)
Shanghai Comp 3 (bearish)
Nikkei 28,0004-29,300 (bearish)
DAX 15,712-16,287 (bullish)
VIX 16.22-23.07 (bearish)
USD 94.63-96.90 (bullish)
EUR/USD 1.124-1.148 (bearish)
Oil (WTI) 74.46-83.70 (bullish)
Nat Gas 3.42-4.95 (neutral)
Gold 1 (bullish)
Copper 4.30-4.60 (bullish)
Keep your head up and stick in the ice,
Daryl G. Jones
Director of Research
