Another robust quarter for US equity markets and as we had highlighted in our Q4 forecast, the path of least resistance in the equity space was higher (SPX +5% in Q4, +20% YTD). As we close out the year, risks surrounding Fed policy have increased amid Washington’s concerns over inflation, which in turn has prompted the Fed to taper asset purchases at a quicker pace and project three rate hikes in 2022.
Alongside this, with Fed Chair Powell also retiring “transitory”, the hawkish move is somewhat reminiscent of the Fed’s 2018 pivot when Fed Officials stated that the balance sheet unwind was on autopilot. It took a turbulent year-end for equity markets to prompt the Fed to reassess their autopilot view.
My view remains that the biggest risk to equities is Fed policy over Omicron concerns. Keep in mind, that while the Omicron variant is more transmissible, data has so far shown symptoms are reportedly less severe than the Delta variant. What’s more, the economic impact of each variant has diminished with economies better able to operate with social restrictions.
Figure 1. Fed 2018 Hawkish Pivot
Figure 2. Fed 2021 Hawkish Pivot
That being said, while the concern going forward will be a move to tighter Fed policy, it’s important to remember that during the first half of the year, stimulus will be at its strongest. Therefore, the bias for equities is likely to remain in buy the dip mode, with a return to a fresh record high.
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