The Lookout | Week of January 31, 2022

The Lookout | Week of January 31, 2022

In this week’s edition of The Lookout, our portfolio managers share what investors might expect following last week’s bouts of volatility in the equity markets and the Federal Reserve’s nod toward looming rate hikes. Read more about what’s on tap this week below:

Major Market Events:

Tuesday, February 1: U.S., German, and Great Britain Manufacturing PMI Release

Thursday, February 3: Bank of England Interest Rate Decision; European Central Bank Interest Rate Decision

Friday, February 4: U.S. Nonfarm Payrolls & Unemployment Report

David Miller, CIO of Catalyst Funds, Rational Funds, and Strategy Shares, on the Equity Markets

• The key driver for equity market returns over the coming week is the perception of Fed policy towards interest rate hikes in March.
• The past two weeks have seen a significant discount built into equity valuations versus the prior month in anticipation of more conservative Fed policy both on rates and a discontinuation of quantitative easing.
• The short-term impact of this has certainly been negative on equity markets, however, historically a strong labor market and strong growth in GDP have been key indicators for long term growth in equities.

Stan Sokolowski, Portfolio Manager, and Natalia Lojevsky, Product Specialist, CIFC Investment Management LLC, Fixed Income Fund

• In short, we’re expecting more of the same.  The macro theme of the year is stimulus withdrawal.  Monetary policy normalization has increased volatility as rates and inflation cause a revaluation of many financial assets.  The most speculative assets have experienced the greatest impact given their sensitivity to liquidity.  We expect this process to continue.
• In terms of our short-term outlook, credit markets have materially outperformed traditional equity and fixed income markets so far this year.  Overall, credit fundamentals should continue to counteract rising macro issues, however, no market can be 100% immune from equity volatility, especially if investor conviction in equity and fixed income assets further dissolves.  We continue to monitor credit spreads and the yield curve, both of which remain well-behaved and healthy.
• Although the journey is not assured, over the longer term, the likely path seems to be good but moderating economic growth, diminishing rates of inflation with some price permanency, higher rates, and less fiscal and monetary support. We’re preparing for a bumpy ride.

Joseph Halpern, Exceed Advisory, Portfolio Manager of an alternative/hedged strategy

• After a week bookended with a 3% drop and pop (Monday) and roughly 3% jump (Friday) by the major indices, one can expect volatility to remain high as investors struggle to read the tea leaves on inflation, global tensions, and general economic performance. Most of the major releases earlier in the week will come out of Europe. Of interest will be whether Germany can return to economic growth and the approach of the European central banks on interest rates.
• Recent hawkish sentiment by the Fed has resulted in rate expectations to increase dramatically with some pundits now calling for 7 hikes in 2022! That is definitely one way to curtail inflation. The effects of Omicron and rolling shutdowns in China will complicate the story further, allowing for a continuation of high levels of volatility and anxiety among investors. However, there is room for a short-term rally given any positive inflationary measurements or given the Fed moves off their current hawkish sentiment.
• Ultimately though, given aging demographics, high debt, and converging central bank policies, it is hard to see interest rates increasing dramatically over the long term. Given this natural cap on longer term rates, if the more aggressive pundits are correct with their rate hike estimates then we will soon be in a flat or inverted yield curve which typically points to recession. Of course, pundits are quick to change course – and to be fair, signs of inflation moderating would quickly result in a change of course by the Fed.

Thank you for reading The Lookout. Come back next Monday for more insights on what investors can expect in the markets.