IMHO we will see something I refer to as a “frowny face” yield curve.
The Fed will raise short term interest rates. Foreign negative rates will suppress the yield on our 30 year Treasuries from rising much. But the mid term bonds will get higher. Flat at first, then “frowny face”.
Of course, that goes out the window if the negative rates abroad disappear.
Human beings tend to be affected much more by negative events than by positive ones. Psychologists call it “negative bias.” This negative bias is reinforced by the media, especially the overtly partisan outlets, to drive ratings.
Case in point: The latest polls show Americans think that economic and business conditions are horrible and getting worse, when in fact the economy and corporations are performing well - so far ( yes, even with Omicron ).
According to research firm FactSet, 10 of the 11 S&P 500 sectors are projected to report year-over-year growth in earnings this year, led by industrials (+35.09%), consumer discretionary (+32.2%), and energy (28.4%). Financials is the only sector projected to report a year-over-year decline in earnings, at -8.9%
Corporate profit margins also are expected to be strong this year, despite rising inflation, supply chain disruptions, and labor shortages. The estimated net profit margin for the S&P 500 for CY 2022 is 12.8%. If that proves to be the number, it would mark the highest profit margin since FactSet started tracking this metric in 2008.
Another reason to be optimistic is the vastly improved employment picture. The following chart depicts the U.S. unemployment rate since 1979, the year that saw the beginning of a brutal recession that was, at the time, the worst economic downturn to afflict the U.S. since the Great Depression.
The Omicron variant has rattled Wall Street but scientists are predicting that it will peak by mid-January. The coronavirus may never go away and instead become endemic and milder, such as the influenza to which we’ve all become accustomed.
The biggest risk of 2022 is inflation. The verdict is still out as to the stickiness of inflation, but it’s fair to say that Federal Reserve Chair Jerome Powell has retired the word “transitory” from his lexicon.
The degree to which the Fed can fight inflation by hiking rates, without torpedoing the recovery, will dictate the future direction of the stock market.
Feds won't raise. They're bluffing.