Market Strategy 4/04/2022
- April 4, 2022
How Long Will This Be Going On?
With the Fed in inflation-fighting mode, the question is not will they hike, but by how much?
Key Takeaways
- Based on economic data released last week, the Fed’s efforts on containing inflation are likely to be aided by the relative strength of the economy, which suggests potential to avoid a hard landing.
- The start of second quarter for 2022 will likely find market participants looking for clues to how the Fed’s likely more aggressive tightening will be digested by markets.
- Q1 earnings season begins in earnest next week when the big banks begin to report. This week will see several key names in health care and consumer discretionary reporting quarterly results.
- Last week saw a sizeable drop in the price of oil as concerns related to the impact on global growth of the COVID-related shutdown of Shanghai and the Biden Administration’s announcement of additional releases of oil reserves suggested that prices were too frothy.
As the first quarter starts to grow distant in the rear view mirror investors will focus on the early tranche of Q1 S&P 500 results this week ahead of the unofficial start of earnings season which begins on April 13 when the big US banks begin reporting results.
Markets are likely to remain volatile with likelihood of their overshooting to either the upside or downside as investors sort through economic data, “Fedspeak,” and geopolitical developments in Ukraine and elsewhere.
For those new to the experience of a Fed “tightening cycle” (when the Fed removes accommodation and tweaks its benchmark higher along with deployment of other tools at its disposal) we suggest they keep their “seat belts fastened.” If Fed cycle newbies can avoid projecting overly negative about the process they’ll possibly discover attractive investment opportunities along the way.
For those who have toiled in the markets in prior decades and still feel a sense of dread at the thought of going through another period when the Federal Reserve removes accommodation we’d suggest they consider where the stateside equity markets have come from and the walls of worry they’ve traversed during and since prior cycles.
We believe it realistic to expect that a hard landing is very likely to be avoided as the Fed takes action.
Don’t Fight the Fed
A strong jobs report Friday supported the argument for the Fed to add a more aggressive tone to its efforts to contain inflation in the months ahead while also suggesting that slowing evident in other recent economic data may aid the central bank in avoiding getting carried away as it works to raise borrowing costs and put inflation in check.
Friday’s report showed 431,000 jobs were added to the US economy in March with the unemployment rate falling to 3.6%--quite close to its 2020 pre-pandemic 50- year low of 3.5%. The jobs numbers for January and February of this year were also revised higher adding to the thought that the Fed may not have to worry as much about the risk of pushing the economy into a recession as it tweaks its benchmark interest rate (the Fed Funds rate) upward and begins to ponder how and at what pace it will reduce its balance sheet.
From our perch on the market radar screen it looks to us that the Fed’s efforts to curb inflation in the months and quarters ahead will likely be more akin to pumping the brakes to slow the US economy rather than pulling the emergency brake and risk sending the economy and the markets through the proverbial windshield.
Jerome Powell in our view has in no way signaled that he’d care to risk a recession by tightening too hard or too fast. The Federal Reserve he heads steeped in Bernanke’s legacy is highly transparent and communicative compared with interventions of prior Fed regimes in the 1970s, 1980s, 1990s and early 2000s.
The secrecy and resultant drama of those earlier practitioners of Fed policy are embedded in the memories of those of us who worked in the markets in those earlier times. We can’t think of many participants who experienced the tightening cycles of the Greenspan era as having fond memories of that period.
Beyond the change in tone and practice at the Fed wrought by Bernanke from his tenure we also consider that the advances in technology that have elevated the quality of the data the Fed looks at from all its sources as well as having the benefits of improved tools for analysis as a result of advances in technology afford the US Central Bank a veritable treasure trove of tools to work with. The Federal Reserve’s collective experience in navigating the Great Financial Crisis, the COVID-19 pandemic and the challenge of economic re-openings while dealing with variant risks should serve it well in dealing with the effects of inflation and collateral damage to supply chains caused by COVID-19, too much fiscal stimulation, supply chain disruptions, and the Russian incursion into Ukraine.
We believe it realistic to expect that a hard landing is very likely to be avoided as the Fed takes action. However, based on the complexity in the levels of challenges the Federal Reserve Board faces in the process of bringing inflation in-line this cycle, a somewhat bumpy landing rather than a soft landing is more than likely.
John Stoltzfus
Title:Chief Investment Strategist, Oppenheimer Asset Management Inc.
John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.
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